Friday's breadth continued the strength we've been seeing. This makes it six consecutive green days for breadth.
Since prior to this string of positive breadth readings we had seen breadth alternate positive and negative every other day for two weeks, it's not going to be easy to pinpoint the day we get overbought. However I can note that we will be maximum overbought Friday, July 13.
Last week we used the Nasdaq Momentum Indicator to pinpoint Tuesday as the day we got oversold. If I use this same method to find the overbought time frame it's far too wide to be of use. For example it shows an overbought reading sometime between this Tuesday and next Tuesday.
Then if we use the "what if" for the McClellan Summation Index we discover that it will currently take a net differential of -1,900 (advancers minus decliners) to turn the Summation Index from up to down. In 2017 this indicator was of no help but in 2018 once this gets to the point it needs -2,000 we have been overbought. It's hard to pinpoint the day using this method but it's likely that if the market's breadth is strong on Monday this will go down under -2,000.
Thus the conclusion is that in the latter part of this week we should reach an overbought condition.
The number of stocks making new highs on the NYSE increased. It's nothing to write home about but at least it increased. Over on Nasdaq, where this index filled a gap on Friday, we see a continued contraction in stocks making new highs with each new high in the index showing fewer stocks making new highs.
This made me consider the small caps since they are nearing their all-time high again. There is now a non-stop narrative about how the small caps benefit from a trade war, which is why they have been leading. We are told there is a strong relationship to the U.S. dollar. Yet the dollar has faltered of late and the small caps have not.
This caused me to take a look at the ratio of the U.S. Dollar Index relative to the Russell 2000. This is the third trip down to these depths this year. The ratio has not reversed back up yet but please notice that every time it has done so from these levels the Russell 2000 has backed off.
I do think the dollar is in the process of topping out (at least for a while), although it is very short-term oversold, and if I am correct about the dollar, then perhaps Europe and emerging markets can enjoy a rally/reprieve from the constant selling we've seen in the last few months. I wrote about this last week, with a more positive eye on VGK and EEM.
Finally I would note that while anecdotally sentiment seems to have turned bullish, it is not yet evident in the indicators. The put/call ratio was 100% on Friday and while that may have been "weekend" related, long-time readers will know I prefer not to rationalize an indicator.