Do Short Memories Lead to Complacency?

 | Mar 09, 2017 | 6:00 AM EST
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HYG

Oil certainly -- or should I say finally -- captured everyone's attention on Wednesday. As it should have. It has been one of the reasons breadth has been weak for so long, so it should have been much more of a talking point. I suppose that shows us just how complacent folks continue to be.

In any event, if we take that little pattern I noted on the chart below and measure it, then we get $50 as the target, where it stopped on Wednesday. If we prefer to include the December rallies for measurement purposes, then a bounce from here should lead back down to the $49-ish area. I lean toward the latter scenario, mostly because there didn't seem to be the sort of hysteria we usually get when something like this breaks down.

Don't get me wrong. It's not as though I saw folks dying to buy the oil stocks or oil itself. I saw many more tell us they would stay away and not attempt to catch the falling knife, which is typical, but are memories so short that folks do not remember 2014 when oil stocks went down almost daily and they were ignored until, well, the whole stock market fell along with them?

Along with oil's collapse was further deterioration in High-Yield Corporate Bond ETF (HYG) . We looked at this chart two days ago with a cautious eye and the decline seemed to accelerate on Wednesday. There is support here and better support a bit lower. But where is the concern?

Maybe it's because folks are staring at the Overbought/Oversold Oscillator and see that it has collapsed. As I noted yesterday, the McClellan Summation Index, which has rolled over significantly, now needs a net differential of +4,200 advancers minus decliners to turn around (from the current down to up). That means it is oversold. My own oscillator is back at late September/early October levels (arrow on the chart). Before you get excited, notice what a crummy rally we got from that reading.

I do think we should see a rally attempt based on the oversold-ness, but when the number of stocks making new lows is now 72, the highest in more than two months, I think it is not so cut and dried. If the TRIN had scooted high over 1.0, I might have thought OK, we saw some fear. But instead the TRIN ended the day at 0.67.

If the put/call ratio had gone over 100% and stayed there, I might have thought OK, there was some fear. But it closed under 100% again. Mostly I saw complacency. And it might just be that the complacency will be with us until one of the major indexes cracks, or at least has a sharp down day.

There was still very little selling in the generals on Wednesday; most of the selling has been in the small-caps, the transports and the aforementioned oil stocks. Either the troops need to stabilize and catch up or the generals need to come back and meet the troops.

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week.

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