Despite the fact that the S&P has closed flat the last few days there is a lot that is going on under the surface.
We already know about small cap stocks and how much they have lagged. They have lagged for more than three months relative to large caps but it is only in the last few days that folks have become rather hysterical over it. The funny thing is there seems to be little consensus. Some think we should not fret while others say it portends bad things to come.
I say I think we'll see the lower end of that trading range in the ratio as support. But we rarely turn on a dime, it tends to develop, and it would be nice if it arrived when the indicators were all in an oversold condition (more on that below).
What you should know is that the breadth of the market has not made a new high in more than a month. Breadth tends to top out before the indexes do. At the 2000 high breadth topped out well over a year prior. In 2007 it topped about six months prior to the high. You can see there is no timing to it but it shows overall deterioration.
The number of stocks making new lows nearly doubled on Wednesday. Once again, I know many will say don't worry, it's all bond funds. I say interest rates matter so to ignore the fact that interest rate sensitive names are on the new low list is to ignore interest rates. I prefer not to rationalize the indicator.
If you want to look ahead though, the Hi-Lo Indicator is currently at 34%. I don't discuss this indicator very often because it does not say much except a handful of times. When this indicator gets down under 15% we are considered oversold enough to have a good rally. The last time it was down there was at the February low. So cheer on more new lows since that's the way this gets there.
The 30-day moving average of the advance/decline line is an intermediate term oscillator. Here too I do not discuss this often because it doesn't change often. As you can see it is heading into oversold territory after having had a series of lower highs on the overbought side since June.
Sentiment though is still complacent in my view. The Investors Intelligence bulls are 61.8%. I think that's high especially when the correction minded folks are now under 20%, the lowest they have been since 2012. The difference is that in 2012 the bears were at 30% which was down from bears at 48%. The bears are currently at 18.6% so what we have is few correction minded folks and few bears.
I say this is nothing that a whack in the market can't change. A whack would get the Oscillator oversold. A whack would get the Hi-Lo Indicator under 15%. A whack would probably bring out some put buying and get the VIX jumpy. Yet all we've been able to manage is a late day sell-off that takes us back to even.