Down Day Doesn't Make Market Oversold

 | Sep 06, 2017 | 6:00 AM EDT
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Tuesday brought an odd sort of overbought pullback. First of all, the oscillator was obviously unable to make a higher high and I believe for now it has missed the opportunity. But what was odd was that for the first time in months, most of the selling was in big-caps and index stocks, not spread throughout.

Breadth on Friday chimed in at +1,165 on the NYSE. The S&P 500 was up a mere five points. On Tuesday, the S&P lost nearly 19 points while breadth was -1,200 issues. That means breadth was essentially flat while the S&P lost 15 points. At least for one day, that is a change from the last several months.

If you would like to add to the positives from Tuesday, let's note the put/call ratio. It was 117%, the highest reading since 119% on March 31. Now the bad news: March 31 marked a high in the market; the S&P 500 lost 1% over the next two weeks. I would simply ask you to recall the chart of the 10-day moving average of the equity put/call ratio I showed here yesterday that showed it had dipped under 60%, an area where we consider sentiment "overbought" (note the chart from yesterday was the equity put/call ratio while the discussion above is regarding the total put/call ratio).

I might even point out that (so far) the selling on Tuesday has not turned the McClellan Summation Index back down. Nor has the number of stocks making new lows expanded on a down day, which has been a regular occurrence in recent months.

But it was the Bank Index that captured my attention. It broke under the 200-day moving average for the first time since July 2016, several months before the election. Remember that the 200-day moving average represents the average price over the last nine to 10 months in the market, which is why it's important to note it. It is, for now, still rising. A rolling-over moving average is more bearish than a still-rising one.

The red line represents short-term support. A break of that shows much better support near 88. But here's the real problem: If bonds don't come down soon, won't any rally back into the 94 area get sold?

For the most part, I think Tuesday's decline, which only took the S&P 500 back to last Tuesday's levels, represents an overbought pullback. Sentiment went from giddy (see the put/call ratio for ETFs on Friday that I cited here yesterday) to concerned (see Tuesday's high total put/call ratio). But one down day will not take the market back to an oversold condition. This doesn't preclude a rally on Wednesday, but we'd need to see a bit more red over the course of the next week or so to get back to an oversold condition.

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