Let me begin with a recap of what I've written on these pages this week. Because I don't see any reason yet to change my mind.
It is a typical sequence to see markets tumble, rebound and fall again as they try to find their footing. We are heading into an oversold condition. Using some of the indicators I follow I have expected that window to open late this week and to be fully open next week.
One of the indicators is the Volume Indicator. It finally fell to 42% on Wednesday. In the past year it has been the level we have seen oversold rallies develop from. Only at the fall low did it get under that to 39%. I would not be surprised to see it fall a bit more than this 42% area, but as you can see, we're a lot closer to being oversold than we were a week ago, and certainly more than we were in early February when we were so overbought (and the indicator reading was 58%).
Another indicator I have been highlighting as heading toward an oversold condition is the Hi-Lo Indicator. Nasdaq's Hi-Lo has been leading the way having been overbought in early February and now sits at .19. Typically a reading under .20 is oversold. Based on the math behind the indicator I do expect this to fall some more and turn up next week. The New York Stock Exchange is behind Nasdaq's and its Hi-Lo is still at .30. I expect that will be in oversold territory next week.
Speaking of new lows, we discussed them in yesterday's column. I explained that as part of the down/up/down sequence what we wanted to see was a contraction in stocks making new 52 week lows. While the major indexes did not make lower lows on Wednesday, we had the first day the market was down and new lows did not expand. I can't yet call that a positive divergence but a non-expansion is the first step.
Then there is the sentiment. Anecdotally we know it's bearish. I do not think it is as bearish as it was in October, maybe not even as bearish as it was in December. But using the Daily Sentiment Indicator (DSI) I can tell you that the S&P's reading is at 15. So if the market falls in the coming days that DSI is going to fall as well and a low DSI reading is bullish, not bearish.
What's new? What's new to me is the move in the utilities. Notice that the utes topped in December and have been in a downtrend since the calendar turned to 2023. Now take a look at the twin lows the utes put in in March. They are now up on the month.
I know this is a group that most ignore, because it's so boring, but I think it can often tell a tale for the market. And the fact that the utes crossed that downtrend line on Wednesday I take as another reason to believe the market should rally next week.
