This Could Get Ugly, and Fast

 | Jan 27, 2012 | 6:15 AM EST
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Let's begin with the number of stocks making new highs -- because, on Thursday, we finally saw more than 213 on the NYSE on Thursday. We had a whopping 233.

If that sounds like I am complaining -- I am. But it is not fair to rationalize a statistic. So, in fairness, new highs expanded, and we should see some sort of retest of that reading at another point in time. Still, for now, after making their highs in the morning on sheer giddiness, many stocks opened up quite a bit, only to give it back in the afternoon. Also, yes, we saw some nervousness creep back into the market as it sold off.

The mantra out there has now become, "I want to buy the market but I want to buy it 1% to 2% lower." Well, heck, everyone wants a discount. I remember my mother visiting me when I lived in Asia -- we were at the Stanley Market in Hong Kong, and she wanted this pair of silk pajamas but refused to pay full price. After she haggled with the vendor for 15 minutes I had to remind her that, after the conversion to dollars, she was haggling over $0.50!

In any case, when it comes to markets we know -- as I have said all week -- that either we won't get the dip, or that dip will be so deep and scary that folks will forget they wanted to buy the dip. The list of reasons for not buying it will have become long.

The same happened with gold. As you'll probably remember, everyone was dying to own it when it was at $1,800 per ounce, but they wanted it at $1,600. Then $1,600 came, and the list of reasons for not buying gold had become long.

So let's make the list of reasons for why the market really should pull back. Stocks are overbought, and not just on a short-term basis for long. As of next week, the market will be registering an intermediate term basis, as well. The financial sector, which did a great job of leading stocks upward in early January, have begun to lag. As I indicated in Thursday's column, it appears they to want to break down from that channel I drew in.

When it comes to ratio charts, I am never quite sure if we should use trendlines, higher highs or lower lows. However, I must report that the KBW Bank Index seems to be losing the battle with the S&P 500. As we have seen time and again, this is a fairly decent leading indicator.

BKX vs. S&P 500

Then there is the 10-day moving average of the put-call ratio, which has turned upward. Typically that means a pullback is in the offing. But what's catching my attention is the turnabout -- and sudden move south -- in the moving average of the ISE's equity call-put ratio. This doesn't always lead to a corrective move, but this is often the case, so I will opt not to ignore it.

Moving Average of ISE Equity Call-Put Ratio

When we look at the volume of Nasdaq relative to that of the NYSE, we find this is also up in "overbought" territory now.

Volume -- Nasdaq vs. NYSE

Keep in mind breadth is still excellent, and we're seeing higher highs in the Nasdaq high-low indicator and in the McClellan Summation Indices. This typically means the market should correct and rally again. It is possible that the correction is a rolling one, in which the major indices refuse to give up ground while individual stocks correct. In that case, it would just be group rotation keeping the indices alive as your stocks go down!

If we've learned one thing from 2009, it's this: The market's perma-bid during Fed intervention periods might keep the averages rising -- but when it's over, it gets ugly in a hurry. Just glance at May 2010 and August 2011 for an example of what happens when the market doesn't correct along the way.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq



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