Starting to Bleed Into the Indices

 | Apr 04, 2013 | 6:00 AM EDT
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It was just about two weeks ago that I discussed the number of stocks at new highs and why we needed to pay so much attention to this statistic. At the time, I discussed the financial and semiconductor sectors, noting that several of those indices' individual components had made lower highs -- which, as I explained, would eventually translate to lower highs in the indices.

Now, however, we must start paying attention to the number of stocks making new lows, which climbed during Wednesday's rout: There are now a handful more than there had been at the late-February market lows. At that point, the S&P had been almost 4% lower than it is now.

The number of new lows is not yet high enough for us to make a major fuss over it. But, as I have explained before, what's bothersome is the rising 10-day moving average of this indicator. That tells us a trend is in place, and that trend is not bullish for the market.

Number of Stocks at New Lows

As for Wednesday's decline overall, there isn't much new to say. The McClellan Summation Index has hit a lower low following its lower high, which also tells us the majority of stocks haven't been participating in the recent rally.

McClellan Summation Index

The sharp underperformance of the Russell 2000 in recent weeks, as well, has taken its toll on the ratio of the small caps to the large caps. When I discuss this relationship, I tend to look at the S&P-to-Russell ratio -- and, typically, when this moves under 1.65 and reverses, it means the stock market is close to the end of a rally. We start to look for the end of a decline when the ratio gets back above 1.75. At present, it has surged up to 1.69, so we are quite far away from calling an end to this underperformance.

S&P 500 vs. Russell 2000

For those of you seeking one of those sharp one-to-three-day rallies that we tend to see after such a pullback, I must tell you that I don't have the statistics to support it just yet. Normally, in order for us to see such a rebound, the Arms Index (TRIN) needs to soar; the CBOE Volatility Index (VIX) needs to jump; and the put-call ratio must get relatively high. None of this has occurred yet.

In fact, the only thing I see that tells us there was a decent amount of selling -- and that, therefore, we could see a small oversold rally -- is that the volume was quite heavy during Wednesday's decline. For example, note that the Financial Select Sector SPDR (XLF) stopped right at an uptrend line and had its highest volume since the November lows.


I'd prefer to see it break that line -- in addition to a jumpy VIX, a high TRIN and so on -- before I'd look for a rebound in which I had confidence.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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