Further Downside Should Be a Relief

 | Sep 09, 2011 | 8:18 AM EDT  | Comments
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What's that old expression -- be careful what you ask for, because you might just get it? Well yesterday I asked for a move in the S&P 500 down to 1180-85. Now that we got it, I'm not so sure it looks so great down there!

I would have preferred the pullback to come early in the morning and not late in the day. It might be semantics, but lately when the pullback has been relatively "drippy" -- the way this one was -- it tends to mean there is more to come on the downside. When the downside has been speedy, it's been a better setup for the upside.

Let's begin with what was good about Thursday's decline. The put/call ratio zoomed back up over 100%, so at least we got rid of some of that giddiness that had crept into the market after Wednesday's trading. Another interesting positive was a minor uptick in the stocks making new highs -- the levels are not high enough to fuss over but they are back to where we were last week when we were up near 1220.

We also got a down day, which would take care of the high reading we had on the put/call ratio of the VIX two days ago. We are also still working off that overbought reading on the Oscillator; you can see that the Oscillator has started to retreat. It will be back toward the oversold side of the ledger late next week.

OBO -- NYSE

OBO -- Nasdaq

Lately I have spent much time showing positive indicators as so many of the intermediate-term indicators have pushed off their lows in the past few weeks. In fact, even though we've had a lot of ups and downs, we have basically had an upward bias for a month now.

Today I want to show an indicator that is not so bullish -- in fact, on its own it is bearish. As you know I prefer a confluence of indicators to form a market view, but this particular ratio stands out like a sore thumb on the negative side.

The ratio of Nasdaq to the S&P is at the high. On the chart below I have circled three other highs. Point A is mid-January; shortly thereafter Nasdaq fell 100 points. Point B is mid-May, which sent Nasdaq down for nearly six weeks into the late-June low. Point C is early August, which I suppose needs no further explanation.

Ratio of Nasdaq to S&P 500

Let me note that this chart is in sharp contrast to a chart that compares Nasdaq volume to that of the NYSE. Circled on the chart below are the same three points in time, and you can see the volume chart had peaks at similar points in time, whereas currently the volume is closer to what we see near lows, so it does not confirm (as it did in the three previous instances in 2011).

Ratio of Nasdaq Volume to NYSE Volume

My conclusion is that the market should back off some more, perhaps early next week. That ought to relieve the still-overbought situation, and possibly the relationship of Nasdaq to the S&P can pull back as well.

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