I'd like to take you back in time for a minute. Late September to be exact. That was the week that the Investors Intelligence Bulls pushed up over 60% (green arrow on the chart). The chart shows it with the S&P (red line) and you can see it coincided with the peak.
Now take a look at what breadth was doing at that time: making a lower high. Yet no one cared, did they? Bulls were all thrilled as we see with a reading over 60%.
Even Nasdaq was making a lower high in late September. You might recall my constant complaining about the number of stocks making new lows soaring on the NYSE. Folks scoffed that it was all Muni Bond Funds and I should ignore it. But look at Nasdaq's new lows from early October: on the rise; they doubled in a week, then tripled in another week.
None of that was good news. Yet where were the bulls? Over 60%.
Please look at the chart of new lows just above. Do you see Nasdaq has made a new closing low vs. late October? There were over 500 new lows in late October. Monday saw not even 200 new lows. That means selling in what was down is drying up.
And just as selling was increasing in September and October and no one cared because their beloved "index moving stocks" were keeping the indexes alive, no one seems to care that selling is drying up now. Why? Because they are finally selling their beloved index moving stocks. Fewer new lows is a positive the same way increasing new lows was a negative.
If we use a different measure of breadth for Nasdaq-cumulative volume (up minus down volume) we see it is nowhere near the late October low now. But the Nasdaq Composite is below it on a closing basis.
Then there is the Nasdaq Momentum Indicator. For a few days I have pegged Tuesday as the day this indicator gets oversold. It reached an oversold a few days after the October low and it reached an overbought condition a day after the early November high so it is far from perfect. But it has been a good guide. And when I walk Nasdaq down 200 points for the remainder of this week, it turns up anyway. It starts to do so after the close on Tuesday, which makes it oversold.
I am not going to tell you this is a great market. It isn't. It's got overhead resistance everywhere you turn. Sellers come out at lower highs. We've got bearishness but the action is not panicky. Yet the Daily Sentiment Indictor (DSI) for the S&P is down to 12. Nasdaq has it at 13. The VIX has its DSI at 80. I think if we were to come down on Tuesday the two stock index DSI's are likely to slip under 10, which has often meant a rally. So my call hasn't changed. I think we rally later this week.