That is exactly the way an overbought market is supposed to act: Even amid good news, it stays in check. Much in the way the market shrugged off bad news earlier in the week, on Thursday three central banks join the easing party -- and the market tried to rally, but exhausted itself and failed to hold it. It is simply overbought.
We saw the first signs of fatigue in the market Thursday. It wasn't just the inability to rally on good news -- it was that the Dow Jones Transportation Index is still under its high from two weeks ago. I am cheering for the index to take out that high, but it's disappointed me thus far.
It was the banks as well. I have not discussed this sector very much of late since, quite frankly, it looks benign to me. The expression we used to use was "dead money." I did, however, notice something in the ratio of the S&P 500 to the KBW Bank Index that I would like to share with you.
On the left side of the chart I have boxed off last year's action. It was my view that the decline this spring was different from that of last summer, and one of my reasons was that this ratio had not fallen off a cliff the way it did during the other decline. However, now take note of the S&P's rally in late June/early, and notice what the ratio did in that rally: It went down. In the S&P's present rally, this recent leg up has not seen the banks participate. That circle on the left is what caught my eye, as the banks also lagged during that last fling up in July of last year.
I am hopeful that this ratio will find some footing and not make a lower low, but I can assure you that this is one of those intermediate-term indicators on which I will focus, especially if it heads into a period of underperformance. For now it's just on a "watch list."
I would be remiss if I did not mention that the index put-call ratio fell under 100% during Thursday's trading. It has been just about a month since this indicator began to be calculated differently. Even though I have looked at the new historical data, I admit I don't much trust its accuracy. Generally speaking a reading under 100% tends to produce a down day shortly thereafter. It is possible folks were looking to hedge themselves in front of the employment number, set for release Friday. So the next few days will be a big test for this newly configured indicator.
For now, this still looks to me like a standard overbought market that should back off and rally again.