Folks seemed quite enthusiastic around midday Monday as the markets climbed from the early morning decline. We know this because at least for a few hours the put/call ratio had fallen under 80% for the first time since February.
But, you see, breadth never really gained any traction and ended the day approximately two-to-one negative. Clearly that is not a good day for breadth, so the put/call ratio did in fact climb to the mid-80s by day's end. That is neutral territory.
But was breadth weak enough to change the indicators? For what seems like the hundredth time in the last month, the answer is still no.
It's as though the breadth is weak for a few days, it threatens to get weaker, and then we get saved with a handful of up days and better breadth and then the routine starts all over again. That and the overbought condition has served to keep the S&P in the range.
Time to Look at a Broadening Top Formation
Before we move on to other statistics, I was asked to discuss the Broadening Top formation in the S&P. Before we look at the pattern, let me quote from Robert D. Edwards' and John Magee's "Technical Analysis of Stock Trends." It is said that the pattern suggests a market that is lacking intelligent leadership (their words not mine!) and one where the public is excitedly committed and is being whipped around.
It is also considered to be a pattern of major importance, and one that occurs at major tops. The pattern consists of a series of higher highs and lower lows, forming what some might call a megaphone pattern. It should also contain seven points. This one does contain seven points as I have noted on the chart.
For me the key factor that should be present though is this: The reversal points should not be more than two months apart. As you can see this pattern, if it were to be real, is two years in the making and so that final point about the timing is nixed right from the start.
I don't want to dismiss the pattern just based on that one factor, but I also prefer when the pattern is working in conjunction with the indicators, and unless and until the indicators roll over, it's just a pattern. Perhaps this is another reason to pay close attention to the indicators.
The Winner: Nasdaq
Nasdaq has clearly been the winner, so let's check in on the number of stocks making new highs. It now numbers around 115. A few weeks ago this was barely able to get over 50, so doubling is good. Yet, you can see that it's going to take a lot of work to get this back over 300 or even 400. For now, though, it goes in the positive pile.
Back to the put/call ratio: I have noted that I think we are much more neutral now with this sentiment indicator. There hasn't been a reading over 90% in a week, which is the longest stretch since February. The 10-day moving average is back in neutral territory, but should we see some low readings in the days ahead, it would start getting down into "very complacent" territory.
So, there is definitely a shift that has taken place, it's just not extreme, but it is heading in that direction.