Breadth has been terrific in this rally. Even last Thursday when the S&P was down 60+ handles breadth was impressive by a mere negative 500 issues. Monday was no exception as breadth continued its impressive ways.
There have been eight days since we started rallying on December 26. One has been negative for breadth and five have had quadruple digit readings. This is not bearish. What it has done though is surge the Overbought/Oversold Oscillator which is based on breadth to a minor higher high.
I actually think even if the market pulls back in the next few days the Oscillator will push higher (it's the math behind it). When the momentum indicator (the Oscillator) makes a higher high it's a positive because it shows strong momentum. It also should be tested at some point (another positive). If you look all the way over to the left side of the chart you can see that was a higher high. It occurred in late February, after that big February plunge last year.
We backed off but rallied again into early March. It was early March where the S&P eked out a higher high and the Oscillator made a lower high. I think that was one reason we set up the March decline.
Now let's talk about the McClellan Summation Index which is still rising. It will now take a net differential of -5,200 advancers minus decliners on the NYSE to turn it from up to down. That's extreme and that's short-term overbought. But again, notice that in the prior two instances the pullbacks were not severe and that overbought reading wasn't what halted the rally.
Finally there is the Nasdaq Momentum Indicator which gets overbought on Tuesday. I have walked Nasdaq up another 200 points in the next week and still the Momentum Indicator goes down beginning Wednesday. Here again, it's overbought but at a higher high.
I think this means we are more apt to see a pullback later this week. At this point I am still thinking that the pullback will not be severe. If we take a closer look at that February time frame on the S&P chart you can see the red arrow is the overbought reading off the green arrow low. Notice that we then rallied again.
I don't think the action last year in February is the template for this year for a variety of reasons but mainly because the oversold was so extreme this time as was sentiment. And the resistance overhead is more so this time as well. But I do think the overbought reading and reaction could be akin to that red arrow: not severe.
I want to end with a comment on the bonds. We did get a back off from those low yields on Thursday as I thought we should. There is resistance starting at 2.75% now on the 10 Year. I think we may ultimately see a move back to 2.85-2.90% to retest the underside of that trend line.
