For the last few weeks I have been in the camp that pullbacks will lead to another rally. I am still in that camp but I will admit that the rally in the final two days of last week left much to be desired.
I like rallies with good breadth. I have said all year that when we see breadth deteriorate it will be a market negative. We saw it deteriorate in late August and all through the month of September as the S&P climbed to higher highs and breadth (orange line) made lower highs. That was a negative.
Go back and look at the spring lows and you can see that breadth was making higher lows while the S&P was probing the February lows. That was good. September was bad.
In late October I praised breadth because it was so much higher than it was in the spring yet the S&P was back to the May low. This was good. In the past two days the S&P has rallied 35 points and you need a magnifying glass to see the commensurate move in breadth. In the last two days net breadth is +580 issues which is just pathetic.
The good news is that the lack of breadth has not turned down the McClellan Summation Index and as long as that is rising we give the market the benefit of the (rally) doubt.
As far as the oversold condition, I realize Nasdaq has been lagging so I checked in on the Nasdaq Momentum Indicator which has been a good tell for us of late. Recall it turned down (i.e. was overbought) Thursday, November 8. When I plug in lower closes for Nasdaq over the course of the next week (down 200 points) this indicator starts to rise after Tuesday of this week. That's what makes it oversold.
I also am not very fond of the fact that the put/call ratio for ETFs was under 100% for the second consecutive day. The last time we saw that was mid-June. I will grant you this market is quite different than June but as you can see the near term result wasn't good for the S&P as it fell 2-3% in the coming weeks.
Yet when we look at this indicator using its 30-day moving average you can see that the green arrow represents where it was in mid-June. That's a far cry from where it is now. It is at a high extreme and the low readings have managed to turn the moving average down, which is what we've typically seen for rallies.
For these reasons I stick with my view that declines should lead to another rally.
I want to end with a follow up on bonds. One week ago I noted that if that red uptrend line broke it meant the downtrend in bonds (uptrend in rates) was nearing the end. I have thought that was the case for a while but to me that was confirmation. There is very good support at 3.05% and I would expect some sort of rally from that level (rates up, bonds down). I think it eventually breaks, I'm just not sure it does it in the next week or so.
