We enter this first full week of December with the market overbought on a short and an intermediate term basis. We also enter it with the CBOE Volatility Index(VIX) at its lowest point since early April. And we enter this month of December with the S&P 500 just shy of that 4,100 level everyone thought we'd rally to a month ago.
We also enter this month with the S&P hovering around the 200-day moving average line. To that we can add there is a big downtrend line here that it now seems all eyes are on. Finally, we enter this month with the S&P red for five of the last six trading days yet net breadth has been positive for five of the last six trading days. Heck net breadth has been positive for eight of the last 10 trading days.
To me that makes this week a big test in the market. For the last year whenever we were both short and intermediate term overbought, the market got wobbly and volatile. Whenever we saw the VIX this low (and the Daily Sentiment Indicator (DSI) for the VIX at 15 we got a bout of volatility in the market.
So what exactly is the test this market will be taking this week? The test is if being overbought and having such a low VIX can give the market a pullback. Because if it can't then I'd have to say the nature of the market has changed.
The indicators haven't changed much though. The fact that mega cap tech has lagged has allowed so many other stocks to rise (see the breadth comments above) and that in turn keeps the McClellan Summation Index rising which is bullish.
But despite breadth's persistent positive readings the number of stocks making new highs continues to disappoint. The New York Stock Exchange saw a modest increase in new highs last week to 104 (over the 98 reading from early November) but it lasted one day.
To look for more than a bout of volatility, I would need to see the Summation Index halt its rise and roll over. In the meantime, my eyes are still focused on bonds and the buck and my comments from last week haven't changed. I still feel the U.S. dollar should rally this week. But I will also be focused on the banks.
The Bank Index was one of the first groups to hold in mid October (vs. late September) and had decent 15+% rise off the lows into early November. But since then, they have been sloppy. Last week, they tested the uptrend line.
Since early November, the bank's choppiness has made its action relative to the S&P terrible and that relationship is now testing the summer lows. Sure this relationship is related to interest rates (notice how the ratio rose in August as stocks and bonds went down) but if the Bank Index breaks that uptrend line then all this talk of bottoming and year end rallies comes into question.