Let's begin by noting that this market is vastly different than what we saw in the spring. Let's forget the statistics and the fact that the intermediate-term indicators are now all coming in comparatively lower. To me the biggest difference here is that, in the spring, there were a handful of momentum stocks that were holding up the major indices -- and, today, that is not the case.
Take yourself back in time about six months and recall that Apple (AAPL) was the market darling. Then there was Starbucks (SBUX), which is now 25% off its spring high. Chipotle (CMG) was a darling in the spring; now, it hovers near 52-week lows. Even Lululemon (LULU), while still near the highs, has only participated by surging one day and then dripping ever since.
We simply aren't seeing that handful of stocks now that everyone feels they need to own -- those clear-cut winners that everyone loves. Oh, sure, now market players love the financial sector because of their performance in the last week. But that is a far cry from six months ago, when that distinct group of momentum stocks went up every single day.
In my oft-repeated suggestion of late -- that we should sell into any rallies we saw -- I did not envision a rally would last a few short hours. But that is all we got. Lately a pattern has emerged wherein stocks rise or are flat on Fridays, while Mondays see the indices sink. With that in mind, I took a look at how next week is shaping up, when we'll see options expiration -- and thus, probably, some more volatility -- and checked in on the Nasdaq Momentum Indicator. It has been a long time since we've even looked at this one, as it requires an awful lot of selling for it to give us a sign that the market is oversold.
What I do here is plug in "what-if" scenarios in which the Nasdaq declines by 10 points (or sometimes 20 points) each day, every day, until the indicator stops going down -- and reverses course upward. In this case, that reversal day has turned out to be next Wednesday.
Let's consider this for a minute. The 1425 level on the S&P 500 seems to be the line in the sand for most everyone. So don't you think that, if this level is broken, the CBOE Volatility Index (VIX) might finally get jumpy? I do. I also think we'll see some of this complacency turn into a bit of fear.
That sort of action is what could lead to at least a decent short-term market low sometime in the middle of next week. Keep in mind that, when the market heads into a low like that, those sessions typically aren't pretty -- and, on balance, they tend to be scary.
Regarding the above charts, also take a look at the low in May on the momentum chart. Such a low is short-term, and at that point the market still came back down again afterwards. So if we see one here, it wouldn't change the intermediate-term indicators; however, it would finally give us a proper short-term oversold reading.
Away from that, I was asked to check in on the chart of the yield on the 10-year U.S. Treasury bond. That uptrend line comes in at 1.65%, but I see a lot of support between 1.60% and 1.65%. I can't tell if this level will break yet, but if we see a "whoosh" in the stock market, that is likely to happen.