Last Few Days Have Changed Some Minds

 | Aug 03, 2017 | 6:00 AM EDT
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For 11 straight days, the S&P 500 has closed in a seven-point range. If that has ever happened -- and I don't believe it has -- it was decades ago. Some people think that means the market is broken. I am not prone to conspiracy theories, so I'll just leave it with the view that it is highly unusual. My guess is we break out of the range in the next two days.

Yes, that means the employment number on Friday could do it, or perhaps it happens before, without the news event. But there are a few items to note in all of this.

First, anecdotally the last few days have seen many folks suddenly "discover" the divergence between the transports and everything else. Or between the DJIA and everything else. Or between the small-caps and everything else. In other words, the last few days have changed some minds.

We know this because the equity put/call ratio climbed to 75%, the highest since it hit 80% on June 20. Recall that just two weeks ago, when the market moved to its overbought reading, it had done so with several consecutive days of seeing this equity put/call ratio under 60%. So the S&P 500 might not have moved much in that time, but the sentiment has shifted a bit.

Nasdaq still has a lot of weakness underneath, beyond the FANGs that are seemingly holding up the index. For example, on Wednesday there were 92 stocks making new lows, the most since 114 in late May. Expanding new lows speaks of weakness underneath.

Recall also that two weeks ago we had seen net volume for Nasdaq positive for nine out of 10 trading days. That was one metric that made the market overbought. Nasdaq's net volume has been negative four of the last five days. That's the weakness underneath I have discussed several times this week.

But you see, that weakness has rolled the Nasdaq McClellan Summation Index (using volume) over. Each day I calculate what it would take to turn the Summation Index from its current down to up. When it gets to the point it needs a lot to turn it, I consider the market oversold. Right now it would take a net differential of +1.5 billion shares (up minus down volume) to turn the Summation Index from down to up.

On the chart below, you can see the last several times it's reached this "what if" level where Nasdaq has rallied. Sometimes it has rallied and come back down shortly thereafter, and sometimes it has rallied and soared. Personally, I would prefer a bit more downside action because then it would need +2 billion shares (that's 2000 on the left scale), which as you can see makes it more than just a little bit oversold; it makes it a lot oversold.

I still believe after a short-term oversold rally we should see weakness again midmonth.

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