Wouldn't Chase Up Here

 | Dec 03, 2012 | 7:30 AM EST
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Is it me, or does it seem as though each market day begins with someone screaming, "The cliff, boss! The cliff, I see the cliff!" à la Tattoo of the 1980s television show "Fantasy Island?" It certainly appears to be more like that than like the "Let's Make a Deal" game show -- although maybe with a paperclip, some tape and scissors from my purse, a plan can be put together. It seems that tenuous right now.

Away from the antics of politicians, don't lose sight of the fact that the employment report is set to come out this Friday, so we might be able to take our attention away from Washington for a few minutes. However, before we get to that, we've got an overbought market to deal with.

The Oscillator did eke out a higher high thanks to a late-day run in the market Friday, but it was not confirmed by the number of stocks making new highs -- and, more important, it was not confirmed by the same calculation implemented with volume. You can plainly see the lower high on the chart of the 10-day moving average of the net of the NYSE volume.

Overbought/Oversold Oscillator -- NYSE

NYSE Volume

As I have indicated, it is unclear if the market will simply digest the overbought condition, or if stocks will retreat to the downside. If the 30-day moving average of the advance-decline line were also overbought, I'd lean with a sharp retreat, but it is not yet there. We'll discuss this indicator more as we get deeper into December, and as the reading gets closer to an overbought one.

But two indicators do require a discussion. The first is Friday's extremely high put-call ratio, which closed at 116%. While it is not common for this to be so high on an up day, or when the market has risen so much, it is relatively rare. Most recently we saw it just about a year ago, also after a sharp rally in the market.

On the chart of the S&P 500 from last December (shown below), I have indicated with an arrow a session in which the S&P climbed 20 handles and the put-call ratio registered at 120%. You can see that a rally followed an equally sharp decline. So, in that respect, it was different from what it is today. In that case, the put-buyers were correct. For now I'll say that a high put-call ratio is bullish in general, but with the market so overbought, I would still not be chasing the upside here.

S&P 500

Another chart that I haven't seen discussed much is the relationship between the KBW Bank Index and the S&P. This ratio eked out a lower low Friday, the lowest it has gone since the market's September high. The banks have traded so poorly in this recent rally, especially relative to the S&P, that this has to be somewhat concerning. This ratio, coupled with the overbought condition, says it's a bad idea to chase stocks up here.

KBW Bank Index vs. S&P 500

I say let's see how stocks handle the overbought condition. I think the market is too overbought to make much progress on the upside, and the best it can do is to go sideways and maybe even get some downside.


Overbought/Oversold Oscillator -- Nasdaq



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