I would like to begin with an anecdotal discussion. It is a sequence that I think is somewhat instructive.
Prior to the election, I noted that no matter the outcome, I thought the market would rally. The questions that filled my inbox were concerned with what the market could do if Donald Trump won. Well, he did and the market rallied anyway. So all the fretting was for naught (in terms of the market; this is not a political statement).
Then after a couple of weeks of rallying, I had earmarked the first short-term overbought reading to arrive around Thanksgiving. By then, my inbox was filled with questions such as, "Why can't we keep on rallying?" Of course, we pulled back and reset the overbought reading.
The next set of questions came along with that pullback and I was asked if I was sure we would re-rally in mid-December. I pointed out that the indicators lined up that way, so yes, I was still of the mind we would rally again. Now we have.
For a month, I have earmarked December expiration as the point in time when we reach both an intermediate-term and a short-term overbought condition. Yet after Tuesday's action my inbox is filled with questions along the lines of, "Why can't we keep rallying through year end?" My answer is we can, but the statistics say otherwise.
Can you see how emotional the market is from this anecdotal wrap-up? And I can't change the date of the overbought reading. In fact, the more we rally the more the overbought reading lines up. Recall that this is based on the moving averages of the net of the advance/decline lines. So if we add a positive breadth day today, then it's just a positive breadth day that will have to be dropped X number of days from now and strings of positive days to be dropped equal an overbought reading.
Again, breadth was not particularly great on Tuesday. In fact, if we add up the last three trading days, we find the S&P is up 25 points and net breadth has lost about 400 issues. You can call it group rotation; I call it not good. Narrow breadth that lasts eventually weighs on the market overall. That's just the way it is.
The McClellan Summation Index, which is based on breadth, is still rising (bullish for the market) but it remains at a lower high. If breadth continues to weaken, it will eventually roll the Summation Index over, and if it rolls over from a lower high it will become bearish.
The transports have not made a higher high, nor has the Russell 2000. No one seemed to care because the put/call ratios sunk to levels not seen since mid-July. The total put/call ratio was 60%. In mid-July it was 62%. The last time it was under 60% was Aug. 10, 2015, definitely not a good time to be buying stocks.
The put/call ratio for ETFs was also 60%. It was 54% in mid-July as well. Mid-July was not a high in the market per se, but we went into a giant chopfest thereafter, as you can see on the chart.
I will continue to monitor the level of the Oscillator and the 30-day moving average of the advance/decline line to see if they can make higher highs; so far they have not. If they do not by the end of the week, I think the best we can see will be a market that goes into chop mode. If some of the other indicators roll over, then I'd look for more than that. Much depends on the action the remainder of the week.
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