For the last three months the market has been in an up/down mode. Almost every two weeks we rally or pullback. But some of you might have noticed that the last pullback feels a bit different. Let's examine why that is.
First, I want to note that I still think we get a rally in early April, but after the rally I think we come down again. If the indicators change, I will change my view on that.
Let's talk about the oversold condition. Look at the Oscillator, because there is not an error there, it really hasn't lifted and it went even lower during Monday's trading day. This is not based on price, but rather market breadth, so the first takeaway is that breadth is weaker this time than in the prior sell offs we've seen. Heck, notice how oversold the market is with the S&P at the highs.
Sticking with breadth, on Monday we looked at the lack of breadth in last week's late week rally but notice the blue line (breadth) off the green arrows: Those were ramping upward. They were leading the way. The S&P was the one that was lumbering along to keep up. Now we have the S&P (brown line) at the highs and breadth is still well below it. That is a change, isn't it?
Last week I drew in the potential for a head-and-shoulders top in the Russell 2000 fund (IWM) , noting that if this rally failed at or below $230, it would look like a head-and-shoulders top. That pattern is still present, especially with the crummy trading in small caps on Monday. But now I have added the 50-day moving average line.
You don't see me discuss this well watched moving average often, because my view on it is as follows: If it is heading up, who cares if we break it? An up-slanting moving average line is much easier to overcome and recapture than a down-slanting or rolling-over one is. If you think of it, that it's the average price someone has paid to own that stock, index or exchange-traded fund over the last 50 trading days, then you know that if it is rolling over, it is more likely to be resistance as folks think, Gosh, I've gotten back to even, whew!
Fifty trading days ago was late January. That means the moving average line is about to drop that early February ramp upward, so if the Russell (IWM) can't get up and over those prices, then the now flat moving average will roll over. And think of all the money that has come into the market since January. That's the 50 day moving average.
Why else does this feel different than the prior two oversold conditions? Because the luster has gone out of the special purpose acquisition companies. The IPOs are now breaking their opening prices handily. The ARK (ARKK) funds /hot stocks are no longer hot. The speculative fever has broken.
Then there is sentiment. At the late January low and the late February and early March low the Investors Intelligence bulls came down to the low 50s. Now they are at 57%. At those prior two lows the American Association of Individual Investors bulls were not over 50%, nor were the bears at 20%. Now they are. Only the National Association of Active Investment Managers reading has come off the boil in terms of those surveys. So sentiment is different, too.
Finally, the S&P barely came down and is right back to the old highs. So, yes, this oversold condition feels different because the indicators are in a different place than they were at the prior two.