Forget the 200-Day Moving Average, This Is the Market's Real Hurdle
You be wondering why the index movers finally rallied Monday, but two other questions are far more important for stocks. Here's where the focus should be going forward.
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It’s not that the market rallied on Monday, it’s that the Fan Favorites rallied. It’s that the index movers rallied.
Did they rally because shorts scrambled to cover? Did they rally because folks wanted exposure to the market and these are the go-to names? Does it matter? Right now it doesn’t. Not to me.
It’s an oversold rally. Still. And the question should be, not what sort of buyers caused the rally but when do we get overbought and when does sentiment shift?
Let me start with breadth. It was pretty unimpressive on Monday. Remember last week when Fed Chair Powell got folks a little bit excited and the S&P 500 rallied 60 points? Net breadth on that day was +1,240. Not bad.
A few days before that the S&P rallied 36 (Monday, March 17) and net breadth was +1,725. Pretty good, right? Friday, March 14, the S&P rallied 117 and net breadth was +1,890. Also good.
So what was net breadth on Monday when the S&P tacked on 100 points? +1,350. Not so great, especially compared to those three days in the last week or so. That’s because Monday was about rallying the stocks that were down so much, namely the index movers, the growth names. It doesn’t make the rally bad, it just means all that broadening out chatter does not apply to Monday.
Here is the chart I showed you a few times over the last week where breadth (blue line) was outperforming the S&P (brown line). But now look at the way the S&P shot up on Monday and breadth sort of sat there.
In terms of the Oscillator, witness how it has finally, after nearly three weeks, scooted up over the zero line like it means it. It is not yet overbought. My estimation is there will be a very little overbought condition later this week, but depending on how the remainder of the week plays out, it’s too soon to say we’re fully overbought yet.
When it comes to sentiment, that’s a different story. The put/call ratio was quite low on Monday (0.78) so folks were keen to buy calls again. The chatter, however, was more nuanced. Everyone is on the same page about how oversold we were. I mean when a guy who is known as a fundamental strategist is talking technicals on television you know he is unsure.
Right now many are focused on the fact that the S&P recaptured the 200-day moving average line. As I explained last week, if the line is rising, it’s generally not a big deal to recapture it. The issue is when it rolls over.
The 50-day moving average line on the S&P is around 5900 and it is declining so that’s a real hurdle, in my view (while the 200 DMA was not.)
I will continue to monitor sentiment and the overbought condition. One other thing to pay attention to: the S&P has not had three consecutive green days since the first week of February. Change that and maybe we’ll get the anecdotal chatter to change.
