We had our first real rally in the market since March 3, and no one seems terribly happy about it. I get it. We had an earthquake in the market last week and earthquakes have aftershocks. Often those aftershocks come in the form of volatility: lots of ups and downs.
As I noted yesterday, the charts don't look good. The market doesn't act great, either. But we didn't get the market down here because everything was hunky dory, did we?
Let's talk about the stocks making new lows. Nasdaq had 623 on Monday while the New York Stock Exchange had 345. Typically what we see is a surge in new lows, a rally in the market and another trip back down where we (I hope) have fewer stocks making new lows to give us a positive divergence.
If we look at the two lows that produced rallies in 2022 and we examine the June low first we can see the surge in early June to almost 1,100 new lows. Then we had a blip of a rally and came back down, but on that second trip down the new lows were under 600.
In the fall the new lows surged to 1,100 again in late September. We had more than a blip of a rally and we came back down. Only on the October trip back down to 3600 on the S&P there were only around 950 stocks making new lows.
Now we have 345 new lows and we've had a blip of a rally. If we do come down in the next few days it would be good to see fewer than 345 new lows since that would set up a positive divergence. Tuesday saw 99 new lows to put it in perspective.
Nasdaq has a similar dynamic at work except that Nasdaq, thanks to big cap tech hasn't been hit as hard as the S&P. The NYSE's Hi-Lo Indicator is at .37 but Nasdaq's which got a head start with the weakness in February is at .21. I expect Nasdaq's will get into that oversold area (under 20) by the end of the week.
Keep in mind that part of the aftershocks of the earthquake we saw in the market last week could bring ups and downs. Yet the S&P's Daily Sentiment Indicator (DSI) only moved to 19 after Tuesday's rally (it was 15 on Monday). That tells me if we get another pullback later this week the DSI is going to get low again.
The same way I spent the February and early March noting that the DSI on the Volatility Index was low and that to me meant rallies in stocks were limited, I think the low DSI in the S&P means the declines should be limited for now.
Think of it like this. I kept saying (with the VIX DSI) if we rally the DSI is going to fall, telling us that we'd be setting up for a bout of volatility. It isn't much different now. If the market falls, that DSI on the S&P will fall setting the market up for a rally (to go along with that oversold condition I've been discussing all week).
That's where we're at, no matter how ugly the charts look. No matter how bad the news is. No matter how many aftershocks there are after the earthquake.