Market Is Oversold, but to What Degree?

 | Mar 10, 2017 | 6:00 AM EST
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Each day when I unmute the television, I am amazed at how many people interviewed will say they expect a 5% correction but it's not worth selling for. Or something along those lines. I suppose if you think the market is going to rally another 20% or so after a 5% pullback, then perhaps that's true. Yet there is an issue with this line of thinking because a 5% decline in the S&P typically means your individual stocks are down well over 10%.

Just take a gander at the chart of market breadth, the cumulative advance/decline line. The first week of March has seen it give back almost all of February's gains. Yet the S&P has given back a mere 1.5%. Perhaps the S&P will never catch up to the individual stocks, or perhaps no one owns individual stocks anymore, but I have a hard time imagining that everyone is a major winner in this last week. This chart says no way.

Yet we are oversold. It looks as though we are more oversold than we are. Let me explain this for a minute. The chart looks oversold -- and it is -- but when you look at the numbers behind the math of the chart, we actually won't be grossly oversold for another week or so. To be grossly oversold, you have to believe the numbers we're replacing today, even if they are negative, will be smaller than 10 days ago. That is simply not the case.

But let's talk about the oversold condition. A few days ago, I noted what it would take to turn the McClellan Summation Index from down to up. Over +4,000 (advancers minus decliners) means we're oversold. As of today, the NYSE needs +4,800, so we are oversold. Yet if you look back at December 2015, we had a somewhat similar situation where the S&P was barely off its high and the breadth was so poor we got oversold midmonth.

Take a look at the Summation Index from back then: It was heading down. Take a look at breadth from then: It was heading down. I grant you, the S&P was down more than it is today, so was the Russell (down 7% into mid-December 2015 and now it is down 4%). I will also note that the S&P is in a different place than it was then. In August 2015 we had had a massive mini-crashette in the market, so this was the aftermath. Now we have been ramping upward for three of four months.

Notice on the chart of the S&P I have a red arrow that shows a turnaround, a bit similar to Thursday's action. That day the put/call ratio finally zoomed up to 125%. On Thursday our put/call ratio finally moved up, to 112%, showing some fear creeping into the market.

But notice the rally lasted a few days and that was that; we headed back down again. When I consider that the VIX has not gotten jumpy, or that we have seen the number of stocks making new lows on the NYSE expand to over 100 issues, or that the TRIN has not gotten high, it makes me think there is another shoe to drop after we relieve this oversold condition.

Even if you look at the oscillator from that 2015 period (red circle), you can see that midmonth rally that came back down in January. So this too has me in the camp that says the correction is not done.

Note: My mother is coming for a visit this weekend (perhaps she will share some market pearls of wisdom with us!). Therefore there will be no column Monday morning. My next column will be Tuesday morning.

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

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