Markets Likely to See Volatility Pop

 | Aug 08, 2018 | 6:00 AM EDT
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Tuesday's rally was a little bit different than what we've seen on these 10-point rallies in the S&P each day. It was different because the defensive names were not the leaders. The Staples, Utes and Drugs did not lead. It was also different because net breadth on the NYSE was +175.

Overall breadth has made new highs. That is not the issue. The issue is that breadth was leading and now it is not. I often show the chart of the McClellan Summation Index to show a very smoothed out version of what the majority of stocks are doing. Since early July it has been going down. This week it is finally making an attempt at holding and turning up. But keep in mind the S&P has already rallied 50 points.

A strong breadth day will turn this indicator up. But why is it taking so long? And why has it made a lower low? I would point out this is the first time since the February low that it has made a lower low. I suppose this is telling us the same thing the lagging number of stocks making new highs is telling us: there are a lot of index heavy stocks doing the heavy lifting these days.

As the S&P approaches the old highs it also approaches this upper channel line.

I bring this up because the Daily Sentiment Index (DSI) for the VIX did not budge; it remained at 8. That's unusual, for it to be single digits two straight days. It gives me confidence that we will see a pop in volatility later this week.

In addition, the DSI for the S&P is now at 85 while Nasdaq chimes in at 83. We might see them get to 90 but that's like squeezing the last penny out of a trade.

Nasdaq also had some waning statistics on Tuesday. The net volume (up minus down volume) was flat. I think it just shows a level of tiredness underneath.

It's possible we see a constant group rotation and churning while the staples and other defensive groups take a rest and industrials or some other economically sensitive group get a boost and that's how we work through these complacent sentiment indicators but I'm inclined to think we see a pop in volatility with a pullback in stocks before the week is out.

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