If, according to the press, the market's woes last week were related to the Chinese market then would someone kindly tell me how it is that commodities, so inexorably linked to the Chinese market and economy, have been outperforming the S&P for nearly a month?
If we use the Dow Jones/UBS Commodity Index we see it clearly. In this example I have used the ETF that mimics this particular commodity index, the UBS ETRACS Bloomberg Commodity Total Return ETN (DJCI). The ETF barely trades, but that doesn't stop us from looking at the ratio of the S&P relative to it. I use this index for commodities because it is not nearly as energy-centric as the much more often quoted CRB. The CRB has nearly 70% of its weighting in energy where the DJ/UBS Commodity Index (usually known as DUBS) has a more even-keeled weighting of 30% in energy. The chart even shows it is on the verge of a higher high.
As for the upcoming oversold condition, we've already reviewed the Nasdaq Momentum Indicator, which will reach an oversold condition on Tuesday or Wednesday of this coming week. The what-if for the Nasdaq McClellan Summation Index (using volume) is now reaching into extremes, where it will require a net volume reading of nearly +4 billion shares. When you consider that the Nasdaq typically trades around 2 billion shares each day, the fact that this would need +4 billion shares net to turn around says it is extreme.
Then there is my own Oscillator, which you see here daily. It is the ten day moving average of the net of the advance/decline line so we look back to see when we are dropping a string of red number. A long string of red numbers implies an oversold condition. I do the same exercise for the 30-day moving average of the advance/decline line. I expect the Oscillator (10-day ma) to get oversold between Tuesday and Thursday of this coming week. I expect the 30-day moving average to get oversold between Wednesday and Friday. Here is the chart of the Oscillator and the numbers behind both indicators.
We see the red clearly on the table of numbers, and we see it gets even redder as time goes on. Considering nearly everyone knows the market is oversold, I do not expect this to be an easy oversold. By that I mean, I fully expect the first several rally attempts to get sold.
I have done some calculations as well and unless the net of the advance/decline line is -2000 or greater on Monday it is very likely this Oscillator will make a higher low. That would be a positive divergence in momentum.
There are other positive divergences as well, such as we still have fewer than 632 new lows (December's peak reading) as well as the breadth of the market is still higher than the previous low.
The equity put/call ratio was 93% on Friday. The total put/call ratio was just over 130% for the second day in a row. I expect the 10-day moving average of the put/call ratio to peak near midweek. As you can see peaks in this indicator are often near lows in the market.
To me there is one fly in the ointment and that is the VIX. It is not yet jumpy. A breakout over that line would make me think it's jumpy. That's not a requirement to get a rally, but it would make me more comfortable with that view.
