If we step back from Friday's rally -- finally, they rallied like they were supposed to! -- and look at what has transpired over the last few weeks we can get a picture of a shift.
First of all, let's recall that back in late August and early September we saw the first signs of the shift, the change from what we'd seen all summer. As a reminder, what we'd seen all summer was the mega cap tech stocks rally at the expense of almost everything else. But then we started to get multiple red days for the big cap indexes. That was the change in pattern that told us to be on the lookout for a shift.
In late August, we hit a low in the market, enjoyed a rally where the S&P 500 rallied nearly 200 points and the downtrodden Russell 2000 small caps managed about 150 points, outperforming the S&P. Then came the early September pullback. The S&P promptly broke the August low. But the Russell did not. That was new, the small caps weren't leading anymore. Well, they were no longer leading to the downside.
Then we had a one-week rally and came back down. Here the S&P came down to the September low and Friday even broke it on an intraday basis. And the Russell 2000? It not only didn't come near the August low, it held above the September low too. There's the shift again.
But it's not just the Russell 2000 now. For the first time since making a high in May, the Transports did not make a lower low on last week's trip down. That's new. Because while it didn't make a lower low than July in August it revisited 14,000 in mid September.
Now we have small caps not making a lower and the Transports trying to hold as well. The place we see all of this playing out in one chart is the Cumulative advance/decline line -- the breadth of the market. There hasn't been a lower low since July. Notice that the breadth peaked in June/July. It tried to make a higher high in early September but it ran out of steam. This means there are a great number of stocks that are starting to hold up relative to the big cap indexes. That was not the case all summer.
Okay, so that's the improvement we're seeing, as the stocks that have been down attempt to find their footing. What about the McClellan Summation Index which shows us the general direction of the majority of stocks? It has been steadily down since June. Sure the descent has slowed somewhat in the last few weeks and Friday it stopped going down again, but this needs to turn higher and push upward -- not limp upward -- if we are to trust those positive divergences we see in breadth above.
The intermediate term indicators are not quite oversold. Some more downside in the next week or two could get them there. So, maybe we rally some more on Monday to get folks a bit more comfortable and then we slip again, getting those indicators oversold and getting sentiment from the current leaning bearish to solidly bearish. That would make for a good set up as we head into earnings season. Can we do it?
Well in my Saturday Twitter Poll folks were leaning awfully bullish with 61% looking for more upside.