That's the Reason for the Rally? Really?

 | Apr 21, 2017 | 6:00 AM EDT
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I could not believe my ears during Thursday's trading. Did folks really say, not just once but several times, that since Congress intends to "maybe" vote on the health care bill again next week, that was not only the reason for the rally but for why we would keep rallying?

Do they not recall how nervous they thought the market was a month or so ago when the vote was coming and the same folks said a no vote was a death knell for the market? Then we didn't even get a vote, and what did the market do? It shrugged. So I am struggling with how this is the "reason" for the rally.

How 'bout, the market was oversold? How 'bout there were far too many VIX calls bought? How 'bout there were far too many ETF puts bought? Maybe I'm just a simple-minded person, but those seem like better reasons to my ears as to why the market rallied.

With that in mind, let's take a look at that Nasdaq Overbought/Oversold Oscillator. Recall that earlier this week we looked at all those red numbers the moving average was dropping. (This is the 10-day moving average of the net of the advance/decline line, so we look at what we're dropping to see when we're overbought or oversold.)

The first thing to notice is we are no longer oversold. I would consider us not even quite overbought yet either. The oscillator has moved back into neutral territory for now. Much depends on what transpires in the markets in the next few days before I can determine when we might be overbought again.

The most impressive change in my indicators came from the Nasdaq McClellan Summation Index. As you know (because I have been harping away), it has been in a steady downtrend for nearly two months. This indicator turned up on Thursday. I realize you likely need a NASA-powered magnifier to see the turn up, but it is there.

While it won't take much to turn it back down, the reason the change is impressive is because it turned up and we're not yet overbought, so if it can keep going up then that would impress me.

While there was an increase in the number of stocks making new highs (i.e., more than we've seen in a few weeks), we must continue to keep in mind that 135 new highs (the reading from Nasdaq on Thursday) is still far fewer than the 590 new highs we saw in December.

Finally, the American Association of Individual Investors bulls were the fewest since the week before the election. I am typically not a fan of this particular survey unless it is confirmed elsewhere, but when the Bulls sink to 25%, it says something about sentiment.

I still think we will see some downside when this oversold rally ends.

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

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