Can't Compare This Decline With May

 | Aug 22, 2013 | 6:00 AM EDT
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I really thought the market would rally for two, maybe three days, and then come down again -- but that was not to be. I do have some short-term good news for you, but I want to point out that my view has not changed: The indices can rally in the near term, but as long as it is not oversold in the intermediate term, I think rallies will fail and come back down again.

First let's go over that good news: Even though U.S. Treasury bonds sold off, the number of stocks making new lows did not expand -- the number chimed in just under 200 on the NYSE, which compares to 479 on Monday. That's a big contraction, especially since the S&P 500 made a lower low.

Number of Stocks at New Lows -- NYSE

To that we can add that the Dow Jones Transportation Average did not make a lower low, and neither did the Russell 2000 or the KBW Bank Index. Heck, even breadth did not make a lower low. (Now there's a first!)

We might even say the CBOE Volatility Index (VIX) is on its way toward jumpiness. This is very subjective, as you know, but I think you can see that the VIX now appears to be breaking out and heading higher. That is what I look for when I say this indicator is getting jumpy. Again, I suspect this jumpiness, when it comes, would be more similar to what we saw early June rather than late June. But at least this indicator is finally on the move.


But the put-call ratio has not been above 100% since July 11. I don't believe we have ever seen an intermediate-term bottom that did not see the put-call ratio go above 100%, or the equity put-call ratio above 80%. Neither has occurred yet.

In addition, the 30-day moving average of the advance-decline line is not yet reading as oversold. My estimation is that this will not occur until after Labor Day. Meanwhile, the Dow Jones Utilities Index has fallen out of bed. The index hasn't yet broken -- a short-term positive -- but the 465 level is very important. It is the June low, as well as where this uptrend line comes in. That uptrend dates back to the 2009, so if it breaks, that would be a longer-term negative. Utes are market leaders, regardless of whether you want to believe it.

Dow Jones Utility Average

Several folks have suggested that this market decline is similar to the one we saw in May and June. I would point out, however, that the two pullbacks have very few similarities when we look at my indicators. The main difference is that, in May, we didn't see this failing number of stocks making new highs, nor did the 30-day moving average of the advance-decline line come in at a lower high as the market headed into the high. We also didn't see the cumulative advance-decline line make a lower high at the peak of the indices, and the McClellan Summation Index didn't make a lower high then, either.  These were all intermediate-term negative divergences that were not present in May. 

Let's look at a stock like American Express (AXP), for example. This is a rather benign name that folks don't tend to get all worked up over, but it is a Dow stock -- and, on Wednesday, it broke a long-term uptrend line. But look at the May high: There is no other previous high, so the selloff looks like a correction and nothing more. By contrast, at the mid-July high it ekes out a minor higher high before coming down. In early August, during the intermediate-term overbought condition with all those negative divergences, this stock cannot even get back up to the previous highs.

American Express (AXP) -- Daily

Now you have a top in place in AmEx, with two attempts to make a higher high that have failed. There had been no top in May. The reason I fuss over new highs is that charts like these are what create the statistics. I am sure that, as you go through your charts, you will see there are plenty of charts that show a lower high in the summer, in contrast to what we saw in May.

To me that, is what makes this recent high different.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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