This Week Could Be an Important Test for Stocks
Let's take a look at the current status as we enter an important week for the market.
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A few things changed in the market last week.
Let’s begin with the obvious: the fever in the speculative names and the metals broke. That doesn’t mean they are about to collapse, but that relentless upside in them was unsustainable, and the fever had to break. I have said this before, but will repeat it. I don’t know if that was ‘it’ for gold. It is possible gold could now go into another extended sideways as it did from April through August. All I know was it had gotten parabolic and needed to come down. The same is true for all those speculative names as well.
When that fever broke, it seems to have given way to some buying of other forgotten names, thus the McClellan Summation Index turned upwards last week. This is the first uptick in over a month, and mostly it has been in a downtrend since July. So as long as it doesn’t turn around and head south, this is good news.
I will note however that the McClellan Summation Index for Nasdaq using volume has not turned back up.
Then there is the Overbought/Oversold Oscillator. You might recall a week ago, I said the market was oversold. Look at the Oscillator and see how it finally moved for the first time in two months (August). That goes hand in hand with the Summation Index finally rising.
Now the Oscillator is short-term overbought. Since the April low, all that has meant is that the market goes into a chop mode, so we’ll see if this time is different. The other times it has meant that small caps get shoved to the side and the mega caps take the lead.
The mega caps have not been the leaders of late. Oh, sure, Apple has had quite a run, but most of the others have drifted down or sideways for the last few months. That’s why, in my view, this week is a big test.
We have several of the mega caps with earnings. We have the Fed meeting. And I am told (because this is not my focus), seasonally, this is one of the best weeks of the year. All while we are short-term overbought.
And what of sentiment? I still think it’s complacent, not giddy. Although I will say the rally Thursday and Friday probably pushed us toward ‘very’ complacent. I say that because the 30-day moving average of the equity put/call ratio slipped—barely—under the recent lows and is now the lowest since that craziness in 2021. It is still quite far from the lows of 2021, but when it comes to this indicator, I would say that’s where the ‘very’ comes from in my complacent comment.
