Be Alert to the Warning Signs

 | Jan 06, 2012 | 6:32 AM EST  | Comments
  • Comment
  • Print Print
  • Print

I promise not to harp on the fact that the number of stocks making new highs was less than half of what it was Wednesday, two days ago -- when the number was lower than the week before. I also promise not to harp on the market being overbought, nor that the 10-day moving average of the equity put-call ratio has hooked upward.

Overbought/Oversold Oscillator -- NYSE

I was asked when the market might be intermediate-term overbought, so let's take a closer look at that today.  As longtime readers will know, I base this on the 30-day moving average of the advance-decline line. Keep in mind that the market only got oversold around Christmas, so it will take a while for it to reach a maximum-overbought condition. Generally speaking, it takes between three and six weeks after this for an overbought condition of any consequence to materialize.

When I look at the numbers the indicator is dropping, going forward, I see a moderate overbought reading next week. At this point I see the maximum-overbought reading arriving toward the end of the month. Generally speaking, this would mean a backing-off mid-month, and then another rally into the end of the month.

30-Day Moving Average of the Advance-Decline Line

The concern with this indicator would come if and when the S&P 500 sees a lower high, accompanied by a higher high or equal high. Notice the lower high (noted with a red line) I have drawn in, which represented the May and July highs in the market. That lower high in the 30-day moving average represented a loss of upside momentum. Not all lower highs give way to the kind of drop we saw in August! More often it's a much milder correction.

For now, we don't know if we'll see a lower high. As such, I'll simply note this: The short-term concerns I have listed in the first paragraph, while quite real, should only lead to short-term pullbacks -- because, as long as the 30-day moving average is not overbought, pullbacks tend to find support. In other words, as I've often said lately, stocks are apt to continue chopping around.

I did note the American Association of Individual Investors' weekly poll Thursday, which chimed in at 17% bears. I have not found a period of time when such a low reading coordinated with an exact market high. More often than not, it takes several weeks to get to a high.

In the past six years, we've seen only two other such low bearish readings. In 2010 one came in late December, after which we didn't see a 3%-to-5% correction until mid-January. A market high didn't come until mid February. In 2005 the reading came in late November. The S&P was near 1270 at the time, and then for the next five to six weeks it traded between 1270 and 1250 -- so, back then, the reading kept a lid on the market.

With the Labor Department's employment number due out first thing in the morning, the one statistic to which I would pay close attention for a short-term market move would be the number of stocks at new highs. If we see a friendly employment number and the market gaps upward, pay attention to any reading that's fewer than 213 new highs on the NYSE. That, coupled with the short-term overbought reading and the 10-day moving average of the equity put-call ratio, would have me looking for some short-term downside.


 

Overbought/Oversold Oscillator -- Nasdaq

Columnist Conversations

1100 Handle May be Around the Corner
The action in the DOW today was the reverse of what we saw yesterday in the index. The rally off the lows in t...
The visualization of data is provided by Capital Market Laboratories (CML). Z is trading $115.95, down 2.8% w...
We are still seeing WYNN hold up above key WEEKLY support here, but I do want to show you what is in the way o...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.