It's Quarterly Expiration and Rebalancing Week. That Magnifies Everything.

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There is a lot of hedging that has taken place in this market. We’ve discussed it for over a month now, with all the puts being bought. We discussed it Monday when I reviewed with you the quite high put/call ratio for the Russell 2000 since the calendar turned to March.

It is my belief that is just one of the reasons when the market turned upward in the afternoon on Thursday that we saw it exacerbated in the Russell. That’s where the puts are concentrated. And this is a quarterly expiration week as well as a rebalancing week. Everything gets magnified.

But the week itself has not seen a lot of selling. The S&P is down about 25 points on the week. The Russell is actually up on the week. The Transports have been green for four of the last five days, and are up on the week. This despite the move in oil.

The banks, which I keep harping about, have sat here all week as well. Software, which got everyone so excited a couple of weeks ago, also sits there. The semis are up on the week. In fact, the only area that really and truly got whacked this week was staples and commodities (ex oil).

But that hasn’t stopped sentiment from getting bearish. The AAII folks saw the bulls stay put, but the bears came out of hibernation to 52%. Many will fuss, but I would remind you that this survey is best applied when there is confirmation from elsewhere. And right now, the other surveys show an increase in concern/bearishness, but they do not show an extreme.

An example of this is the NAAIM Exposure, having come down to 60. We entered the year with the reading over 100 (they were on margin), and it has slowly leaked all year. I do not view this reading as extreme, just another step in the direction to show a change in sentiment.

Yesterday I said I was pretty certain the Nasdaq market would see a contraction in stocks making new lows (vs early February), but I was uncertain about the NYSE. Nasdaq, despite the increase in new lows on Thursday, still had fewer new lows than early February, but the NYSE saw a marked increase. This is the highest reading in more than six months.

That means the NYSE’s Hi-Lo Index is now at .38. It gets oversold under .15. Nasdaq’s Hi-Lo Indicator is now under the November reading and clocks in at .23. It is getting quite close to a reading under .19 that would finally get this to an oversold condition.

Based on the math behind the indicator, I am unsure if it gets there in one fell swoop or if it has a short-term rally first. But at least it is finally closer.

We continue to have a market with little conviction. We drip on the downside, and folks seem to believe there will be a resumption of the ‘nothing but up’ market as soon as the news changes. We’re oversold enough to rally in the short term. So far, all that’s done is give us a sideways market, a loss of downside momentum.