Still Looking for a Decline Into August

 | Jul 28, 2011 | 7:00 AM EDT  | Comments
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Henny Penny, the sky is falling!

That is what I expected to hear on Monday, but it took until Wednesday before we heard such sentiment and saw the kind of selling that indicated that folks were scared.

I do not mean to poke fun at the potential downgrade of U.S. debt or the circus that we have in D.C. at the moment, and I surely do not want to make light of the decline in the market, but I saw Maria Bartiromo gushing over the market last Thursday with the "best day this year" chatter, and on Wednesday she was practically attacking her guests about the horrors of a U.S. downgrade. That was surely a change of sentiment.

Couple that with Dick Bove's "sell everything" call, and you really would have thought the S&P 500 was trading at 900 instead of right back at last week's low. I suppose my mother will surely call me again!

Statistically speaking, we had 90% of the volume on the downside on Wednesday, which often leads to some sort of short-term rebound in the market. Then there is the McClellan Summation Index. Each day I calculate what it will take to turn this indicator from its current direction to flat or for a change in direction. It is presently heading down, which is bearish. However in the short term, the "what if" to see what it will take to turn it flat shows a very short-term "oversold" condition. as it now requires nearly +4,000 advancers minus decliners to flatten it out. With approximately 3,000 issues traded on the NYSE, that is more than one day's worth of trading.

 

But I've been looking for the market to head down in August based on the indicators, and that hasn't changed. The 30-day moving average of the advance/decline line is only now overbought, so it is nowhere close to oversold. It will take it until at least sometime near August expiration before I can see an oversold condition.

 

The new highs and lows I have been complaining about continuously did not improve at all during Wednesday's action. New lows expanded, and the Hi-Lo Indicator is hovering at 60%, not under 20% where it was in June. I suppose it need not get all the way down to 20% again (although I believe that is likely), but at the very least the new lows would have to stop expanding, and that is not the case right now.

 

I have also harped away about the cumulative advance/decline line and cumulative volume; both made lower lows than last week while the indices are still hovering at last week's lows. This narrow leadership has been a problem in the market for several weeks now, and it continues to play out.

We are supposed to have a vote in Congress today -- visions of the TARP vote come to mind -- so I suspect the market action might finally wake up a few of those folks in Washington. I'd look for some upside relief based on the minor oversold condition and high volume, but I'm still looking for some downside in August based on the other indicators noted.

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