A Sign That Most Stocks Are Heading Down

 | Aug 10, 2017 | 6:00 AM EDT
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It is now 16 straight days that the S&P 500 has traded between 2470 and 2480. There are those who think this means the market is rigged. As I have stated, I am not a conspiracy theorist when it comes to markets, so perhaps I am naïve and ridiculous to believe this is just how the market is now.

I have one thought on this, though. For 18 of the last 19 trading days, the Market on Close (MOC) orders have been to buy. That is rather extreme. We have looked at the chart of the 20-day moving average of MOC orders before when it was last up at this extreme. At the time, I indicated we had only seen it this extreme twice -- once was a market high and the other was a low.

A third instance occurred in early March. The S&P did not correct a lot, but over the course of the ensuing four to six weeks it did an awful lot of drifting down and nowhere. This will be a test to see if this indicator signals something, especially if/when we see the MOC flip to "sell" from the constant "buy."

As for Wednesday's market, the divergence between small-caps and the S&P was loud as the Russell 2000 closed down about 1% to its lowest close since June 6, and the S&P 500 closed flat again.

The poor breadth keeps the McClellan Summation Index heading down, which tells us the majority of stocks are heading down. The number of stocks making new lows on Nasdaq increased to 120 from 89 just over a week ago. Thus, there was no positive divergence to be had. That is also the most new lows we've seen for Nasdaq since just before the election.

If you want the good news, then we look toward the fact that the equity put/call ratio was 83%, the highest reading since mid-June. That means we relieved some of the complacency that has been abundant in the markets of late.

If you want more good news, it's the fact that Nasdaq is oversold. In fact, the oscillator is the lowest it has been since just prior to the election. There has been a change, though. Last week, the oscillator was oversold and we didn't get a big rally. That is the first time this has happened since the election. And instead the oscillator went lower.

The oscillator for the NYSE is also getting oversold (although not nearly as much). This indicator has been lower since the election, when it got grossly oversold in early March. But as I explained then, when the Oscillator moves down so far ahead of price, typically it means there will be a rally and another move back down because we need to see a loss of downside momentum, which means a higher low in the indicator. It may not be easy to see on the chart, but the S&P 500 came down to a lower low after that extreme oversold reading and the oscillator made a higher low. That is more typical and therefore what I'd expect.

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