The number of folks who were shocked and stunned at the turnaround in the market on Tuesday got me thinking. Yes we're overbought but overbought doesn't mean we have to see the market tank. I've been saying chop or maybe some downside (I still think that). But it's as if everyone is a teenager looking for instant gratification. We get overbought and if the market doesn't react ASAP folks get upset.
Let's go back to the Nasdaq Momentum Indicator. It got overbought on Tuesday. No matter what I plug in going forward for the next several days, the indicator goes down. Is it perfect? No, of course not. Nothing is. But it's a good guide in my opinion.
Then there is the fact that we started the day on Tuesday with quite good breadth. The S&P was down and the NYSE breadth was about +500. I thought that was a good showing. Then the S&P rallied about 20 points from the low. Do you know where breadth ended the day? +420. That folks, is what overbought looks like. In an oversold market that breadth would have gotten better all day, not gone down.
The McClellan Summation Index still needs a net differential of +600 advancers minus decliners to turn back up. Let me remind you, the S&P is at a new recovery high but this is at a lower high and not heading up. Again, I think this is the overbought reading at work.
Last week I complained about the number of stocks making new highs since the NYSE had only seen 138 new highs which was a far cry from the 200-ish we'd seen in June. Tuesday there were 67 new highs. My math says that's half of what we had last week. Again, that's your overbought market.
Oh wait, you think Nasdaq must be better, right? For Nasdaq I find net volume (up minus down volume) works better than the advance/decline line. In the last three trading days net volume for Nasdaq has lost 100 million shares while Nasdaq has gained 27 points.
As for stocks making new highs on Nasdaq, last week there were 157 new highs which I thought was nothing to write home about because we'd seen over 300 in June. Tuesday brought us about 100 new highs. This is the overbought reading hard at work.
The one thing that has helped is sentiment. The put/call ratios remain elevated. The total put/call ratio hasn't seen a reading under 90% since June 22, that's almost a month. I would however point out that the Daily Sentiment Index (DSI) for the VIX moved to 7 on Tuesday. Typically a reading under 10 and we see at least a short term rally in the underlying instrument.
So yes we're overbought. And no, the indexes haven't gone down, but as you can see from the statistics above the majority of stocks have chopped. I still think we are more apt to chop or have a bit of downside, especially when the DSI on the VIX is so low.