Something changed in the market on Friday. It began on Thursday, but Friday solidified it.
For months, we've had this divergence between the breadth of the market and the indexes. For months we've had this divergence between the haves and the have-nots. The have group has been getting smaller and narrower with each passing day. Just read, the new high list to see how narrow the rally had become. The have-not group was gaining traction and spreading. Read the new low list to see how pervasive the have-nots had become.
At first the bulls ignored it, noting it was okay because tech, financials and health care were still going up. They called it a stock-pickers market. They were actually correct. But when the names going up are fewer and farther between, the market begins to falter. I believe it was Friday's action in Biogen Idec (BIIB) that was the wake-up call. The stock -- in the beloved biotech group -- gave up all of its gains from 2015 in one day, more than 20%. And they say commodities take the stairs up and the elevator down.
All of a sudden, everyone is talking divergences. All of a sudden, maybe all those stock buybacks with stinky revenues isn't so great. For weeks each time I would comment on the number of stocks making new lows the response would be something akin to, "But how many are commodity names?" As if that made it OK. As you know, my response was often that I see semis and retailers and even a few social media names there, too. But when they took out a General on Friday, that was it. Now, all of a sudden this market had issues.
Sentiment is typically like that. Thursday we saw the first signs of concern when for the first time in nine trading days the put/call ratio went over 100%. Friday it zoomed to 141%. July 8, the last previous low in the market, saw the put/call ratio zoom to 145%. So, I think you can see what I mean when I note that Friday sentiment shifted.
I think we are getting set up for another oversold rally this coming week. The Oscillator I use is the 10-day moving average of the net of the advance/decline line. Since it is a moving average, we look back to look forward. Here is a chart of the Oscillator, which for now is at a higher low, although I am not sure it can stay that way. But we will monitor it.
The table below shows you the data behind the chart. What we look for is a long string of red numbers. This shows us the numbers the market will drop, so a long string of red numbers means the market's oversold (you'd have to replace that red number with an even worse red number to get more oversold). As you can see sometime between Wednesday and Friday, we start to drop quite a string of negative readings. That makes the market maximum oversold in that timeframe.
The last oversold reading arrived as the Greeks decided to accept the Euro Group's terms. The last overbought reading arrived as Apple (AAPL) reported less-than-hoped-for earnings. This coming oversold reading happens to arrive as the Fed opines on Wednesday. Sometimes it just works out that way!
But please note that the 30-day moving average of the advance/decline line is not oversold. There are no strings of red numbers present there. So, this would not be an intermediate-term oversold condition, just a short-term one.
In addition, the number of stocks making new lows has expanded once again, this time to 432 issues. There is no positive divergence in place this time. The VIX is not yet jumpy. The 10-day moving average of the put/call ratio has only just turned up as well.
Also, keep in mind that I always prefer a W pattern. That's what we saw in early July. It's possible the market rallies early in the week and comes back down later in the week to form a W and give us some positive divergences, but we'll have to see how that plays out. That is the preferred scenario.