When Giddy Shifts to Nervous

 | Jan 24, 2012 | 6:22 AM EST
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I heard someone on television say the market was the most overbought it's been in three years. Wow -- I have no idea what measure they are using, but I don't see one indicator showing the market as being this overbought. In fact, as we discussed Monday, thus far many overbought indicators are at lower highs. Also, perhaps this person was using "three years ago" as a general area, but that means January 2009, and we all know the market wasn't grossly overbought at that point. Your mother probably taught you that you can't believe everything you hear, and I would have to concur as far as this is concerned.

I would note, however, that the Nasdaq had its first two-day losing streak since Christmas week. I realize "losing streak" is a loose term -- if we add up the total loss over these two days, the Nasdaq declined about 4 points. Nevertheless, those two down days, along with all the chatter about the overbought condition, seemed to bring out the put buyers: The put-call ratio rose above 100% for the first time since the final days of December. So, whereas last week there was a sense of giddy-ness in the market, more caution was clearly being practiced Monday.

This is not to say all is rosy. The market is heading toward a maximum-overbought reading sometime later this week, as I have explained. Then there are the transports. Do you recall last week when Union Pacific (UNP) reported terrific earnings and everyone was so excited because the Dow Jones Transportation Index was breaking out? Why haven't those same folks noticed that the index has given it all right back? That's a 100-point roundtrip in a matter of days.

Dow Jones Transportation Index

Now, the transports haven't broken yet. It would take a break of that uptrend line (around 5200) to spoil the trend higher that has been in place for the last two months. But this action tells us to be careful of gaps up on earnings in this market, especially if they come after we've already seen a run-up.

To me this chart of the transports explains more about the giddy-ness that entered the market last week and the nervousness that developed between Friday and Monday. Keep in mind everyone wants to buy the dip. As a result, either there will be no dip or it will be larger and/or will come on news scary enough to make folks want to sit it out.

In the meantime natural gas has rallied. I am sure you almost fell off your chair when you saw it -- I know I did! The decline had been relentless, but the rally has been huge as well, and it came on big volume. There is some resistance here, since there is a little gap to be filled, but the real resistance comes up in that area of $2.80 to $2.90 per MMBtu. That's where the downtrend line comes in.

What I find amazing is how many are now calling for $1 nat gas. Perhaps they aren't anymore after Monday's move, but over the weekend they had been. I don't know much about the fundamentals, so these folks could be very correct. However, I do know that you tend to hear these sorts of extreme targets when something is late in the decline.

Natural Gas


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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