Stock, Bond Panic and an Oversold Condition Could Be Lining Up
Market sentiment could be shifting and the Magnificent Seven names are the next ones to watch.
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It is my belief that the last few trading days of 2024 coupled with the first trading day of the new year (Thursday) being down was shifting sentiment. It is also my belief that last Friday, folks were fast to embrace the rally.
Anecdotally, I think some were disappointed in Monday’s trading, but we surely did not see it in the options ratios, which remained low. However, as I said on Monday, if we can get some negative market action, I do think we can get sentiment to turn sour enough. Of course, that probably requires the Mag 7 type names to roll over.
We looked at the Overbought/Oversold Oscillator yesterday and I noted that it was reaching toward an overbought reading. That is still the case. That is what happens when breadth is positive for seven of the last ten trading days.
Long time readers know that I look back to see the numbers we are dropping. If we are dropping a string of positive numbers (breadth) we’re overbought. If we are dropping a string of red numbers we are oversold.
I also use the 30-day moving average of net breadth to determine an intermediate term overbought and oversold condition. It’s the same method, to look back to see what we’re dropping.
Over the next several days, both the ten- and 30-day moving average lines are dropping positive numbers. But look down the list and you will see I have circled Tuesday, January 21. The 30-day moving average drops a long string of red numbers starting that day.
Monday breadth was red. If we can get breadth red for several days in the coming days, we’d have a set up where both the 10- and 30-day moving average lines were both oversold at the same time. A lot has to happen, but it starts with negative breadth.
If breadth turns negative, sentiment likely will as well, although the Mag 7 would have to stall or turn south, too. But take a look at the number of stocks making new lows on Nasdaq. When Nasdaq was at 19,300 at the FOMC Low, there were 347 new lows. The new lows at last week’s 19,280 close were a mere 171. So, I ask myself if Nasdaq fell 600 points from here, do I think there would be more than 347 stocks making new lows? No, I do not. And that would be a positive divergence.
This brings us to bonds. With the yield at 4.6% and closing in on the spring highs, I would say this is problematic. But my view has been that rather than creep higher, we could use a panicky-type move, something that gets everyone chattering non-stop about the bonds. The Daily Sentiment Index (DSI) is 13, having already reached nine a few weeks ago, so sentiment is in the right place. I just always prefer when we have a Realization Day that makes it the topic of the day.
So, perhaps over the next week or so we can get some panic in the bonds, some panic in stocks and an oversold condition that lines up. Hey, at least I can finally see the possibility of it lining up for a rally that lasts longer than a few days.
