Here's the Simple Move That Would Bring on the Bearishness
As I've said, expect volatility. But if you want to know what could open the flood gates, it's this.
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I was asked yesterday why does it matter if we are intermediate-term overbought. I would say that Thursday’s action tells us exactly why. For a few weeks now the market has been unable to make much upside progress.
That doesn’t make it bearish, it makes it overbought. To make it bearish we need to see aggressive selling. That means we need to see the McClellan Summation Index, which is heading down, get to the point where it needs more than +1,000 advancers minus decliners on the New York Stock Exchange to halt the decline. I always look at this number that it will take to turn the indicator as a sign of weakness or strength.
If it takes more than +1,000 advancers to halt the decline I see it as weakness in the market. To me it’s a sign that selling has gotten, or is getting, more aggressive. Under +1,000 and it means just one day of positive breadth can change the indicator. Over +1,000 and it’s going to take more than one day, thus it feels to me like we’re seeing more aggressive selling.
I have noted that the number of stocks making new highs has been faltering, unable to increase. But the flip side is the number of new lows is not increasing. If I saw new lows increasing, it would signal to me that the selling is getting aggressive. With new lows on Nasdaq at 55 on Thursday, that is not aggressive. I would consider over 125 aggressive, because that’s the peak reading we’ve had since the market lifted off the lows.
But as long as we are overbought, it makes it difficult to make much headway and –this is key — it opens the window for more aggressive selling. In other words, aggressive selling when we are oversold is bullish to me, because it means we’re getting a cleanout. Aggressive selling when we are overbought means be careful because the flood gates can open. So that is why we care about the market being intermediate-term overbought.
Aggressive selling when we are oversold is bullish to me, because it means we’re getting a cleanout. Aggressive selling when we are overbought means be careful because the flood gates can open.
Sentiment using the options ratios remains complacent, but the surveys have seen very little complacency. The American Association of Individual Investors bulls and bears barely changed this week. The National Association of Active Investment Managers folks knocked a few points off their exposure, but they are still at 81 (down from 88). And the Investors Intelligence folks barely budged, as well, although they do have more bulls than bears.
Thus my call for the time being is an increase in volatility. And volatility did, in fact, pick up on Thursday. I don’t think this line I have drawn is the be all or end all, but it does show a series of higher-lows since December. Let’s see if the Volatility Index can get itself over 20.
In the meantime all eyes will be on the employment report on Friday, which may also bring us some volatility. The question is if it will bring us aggressive selling. Because that is what would change the indicators.
The Oscillators
