When the stock market doesn't correct, or if when it rocks back and forth, folks seem to fall into one of two categories. One group believes caution is in order, reasoning that the eventual market decline will be massive -- a crash. The other group takes on the view that, while a correction could come at any time, the action is an opportunity to buy.
In my view, both groups are correct on some levels. It is true that, the longer it takes a market to actually correct, the worse that correction tends to be. To call for a crash, though, is absurd to me. Why call for an anomaly?
Folks in the second group -- those dying to buy the correction -- always seem to forget one thing. Markets do not correct because the news is sunny and bright. They correct because something goes awry. If that something takes the market down, say, 10%, we all know the news and the market will be scary enough for them to wait before they pick up any stocks.
The market cycles may have changed in the last 18 months, as the indices don't seem to be able to decline very well. However, human nature does not change. People always want to buy the dip, and then when the dip comes, it seems folks always come up with a host of reasons as to why they shouldn't buy it.
As far as current statistics are concerned, we continue to see decent market breadth -- and these better numbers have managed to keep the McClellan Summation Index rising. Now, the issue is that breadth has been positive for seven out of the last 10 trading days, which means the market is again heading into overbought territory on the shorter-term Overbought/Oversold Oscillator.
As you can see, it looks likely that this momentum indicator will make a lower high once again. Given that this lower momentum would come along with a higher high on the S&P 500, this would constitute the second negative divergence we've seen of late. The first arrived right at the beginning of the year, and it resulted in that minor 2% pullback.
In terms of sentiment, the ISEE equity call-put ratio was above 200% for the third day in a row. When I looked back to see the last time this occurred, I was quite surprised to see it was in the final days of July 2011, just before the market tumbled 20%.
In fact, 2011 was riddled with strings of above-200% readings on this indicator. In each instance, these strings of high readings resulted in short-term corrections, even if they didn't all lead to anything nearly as dramatic as what we saw in August of 2011.
For that reason I want to reproduce a chart I showed here Monday, the 10-day moving average of the CBOE equity put-call ratio. In green, I've marked off each time the indicator fell below 60% and then turned up -- and, as you can see, it has turned up this week.
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