Still Seeking an August Swoon

 | Aug 01, 2011 | 7:00 AM EDT
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The debt-ceiling deadline awaits. But was there panic? Oh, there was a bit of it Friday morning, but that had subsided by the end of the first hour.

Let's begin with the oscillator: It is oversold. But do you really need the oscillator to tell you that? The advance-decline line has been red for six trading days in a row now, so of course the market is oversold. Throw in the fact that, in order to turn upward, the McClellan Summation Index would now require more than 4,000 advancers minus decliners on the NYSE -- another solid sign of short-term oversold condition.

Overbought/Oversold Oscillator -- NYSE
Overbought/Oversold Oscillator -- Nasdaq

In addition to that, the put-call ratio finally showed some fear on Friday when it reached 120%, a level not seen since mid-June. In other good news, the Russell 2000 finally outperformed the S&P 500. The trend in this relationship has revealed the Russell's underperformance for a month now, but July 14 was the last date that the small-cap benchmark had a better day than the S&P. At that point, the market rallied for a few days and then came down again.

What bothers me about seeing any sort of lasting rally at this point is that the market is not oversold on an intermediate-term basis. It also bothers me that the number of stocks making new lows exploded Friday.

There is good news and bad news in that statistic. The good news is that, when we see spike lows such that on Friday, accompanied by such an explosion in the number of stocks making new lows, the latter tends to comprise a peak reading that can easily cause a positive divergence to occur if and when that area is retested. For example, 179 stocks made new lows on the NYSE Friday. That is the highest reading in more than a year. If the S&P comes down again in the next few weeks and breaks Friday's intraday low of approximately 1282 -- and if there are fewer than 179 new lows -- we'll have a positive divergence.

The bad news is that, when the S&P was trading at 1260 in mid-June, there were only 114 stocks making new lows. This tells us how many stocks are now underperforming the indices. Once again, I would note this highlights the narrowness of the recent upside in July. The upside has been narrow and the downside has been broad.

NYSE Lows w/ SPX

Then there is sentiment. The Investors Intelligence readings this past week showed 49.5% bulls. I realize my inbox will be full of folks who tell me the number is old and that next week there won't be so many bulls, and so forth. I preemptively concur. But I also know it is a rare market event that sees stocks getting to intermediate-term low when the Investors Intelligence readings show nearly 50% bulls and approximately 20% bears. We can see oversold short-term rallies, but rarely anything long-lasting.

Further, unless Barron's had a bad print, weren't you shocked to see that the Market Vane had bulls at 59% this past Wednesday? Wow. This is a phone survey, so it doesn't take that long to reflect the market action! In mid-June this group was only 50% bullish.

Perhaps I am nitpicking, but doesn't it also seem too perfect that the S&P bounced off its 200-day moving average line, the Russell 2000 off the 770-to-780 area that acted as support in June, the Dow off 12,000 -- and all this as the Nasdaq hovered at its 50-day? All things considered, I will stick with the same theme I have stayed with for weeks now. That is, the market is oversold enough in the short term for a bounce, but I continue to believe stocks will have to come down again sometime in August. The upside remains limited, at least until there are some positive divergences.

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