This Market Needs to Get Properly Oversold

 | Aug 10, 2018 | 6:00 AM EDT
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For three straight days the S&P has churned at the highs. There is something interesting in that though. Nasdaq which has gone on to make higher highs on every rally thus far has not done so this time either.

I think it has to do with the tiredness we've seen underneath in the market. I think it has to do with the upper channel lines that I have drawn in here for both the S&P and Nasdaq. I think the market needs to get properly oversold in order to have a rally that has momentum and we haven't gotten properly oversold.

Typically to get properly oversold we need a pullback. We haven't had any pullbacks, all we've had is churning. So while breadth stayed flat on Thursday, it didn't budge the indicators. The McClellan Summation Index is still flat to down.

The most interesting statistic to come out of the trading day was that the ISE equity call/put ratio jumped up over 200% for the first time since January 26. I do not discuss this options ratio very often but it is a call/put ratio instead of a put/call ratio so a high reading for the ISE is akin to a low reading for the CBOE's put/call ratio. Thus the high ratio tends to mean we've got some giddiness in the market.

I realize that the January 26 reading is scary but we had a high reading on January 8 as well. That's the red arrow on the chart. If you squint you can see that we had a big gap down and stocks spent the day recovering and then we went up for two more weeks. At least it shook things up!

Back in mid-November we had similar instance where the ISE Equity ratio was high and we ended up with two days of volatility before the market marched ever higher. That's the blue arrow on the chart.

To go along with this the Index put/call ratio slumped to 80% on Thursday. This is the lowest reading since July 26, just before the S&P had its recent tumble. All in all, sentiment hasn't shifted very much but these two different options ratios did shift.

Since I have been of the mind that we should see volatility pick up in August -- and I have been wrong thus far -- I think these indicators could be the tell that we should have a bout of volatility. Am I hopeful? Maybe but look at the chart of the VIX. It had quite a turnaround on Thursday, especially considering we're only talking about the S&P moving four points to the downside.

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