The overbought pullback seems to be right on schedule for everything but mega-cap tech. More interesting is that usually when the mega-cap names work, the S&P 500 hangs in there and is down marginally at worst -- but that was not the case on Tuesday.
Another minor change is something I noted about two weeks ago, but has become more pronounced in the last week. Higher interest rates no longer seem to be a bogeyman for tech and growth stocks the way they were last spring. And, banks are not responding to higher rates -- or at least they haven't in the last few days. I am certain someone will report to me that it's because this time rates are moving up due to inflation rather than a stronger economy, but that's the narrative. I am focused on the relationships.
You probably don't need me to tell you that breadth wasn't good on Tuesday. In fact, what it managed to do was remove that cushion the McClellan Summation Index had. We entered the week knowing that a net negative 1,300 advancers minus decliners on the New York Stock Exchange would halt the rise in this indicator and we had negative 1,100, which stalled it out. That means any further weakness in breadth and it will roll back over.
Should the Summation Index roll back over, we'll be right back where we were a few weeks ago, when the index movers are the only thing working and you probably don't need me to tell you that is not a healthy market.
Since we just got overbought, I don't have any idea when we might get back to an oversold condition, so we'll just have to wait for the market to tell us. But you can see the Overbought/Oversold Oscillator is heading down now.
I had noted that sentiment is mixed and I still feel that way. Anecdotally, it seemed to me there was an awful lot of chatter about what a difficult month September can be. I thought of a few things as I heard this mantra repeated all day on Tuesday.
First of all, where were these folks in late August? Nowhere to be found, because stocks were rallying of course. But it also had a ring to what we saw in early August, when everyone was so busy passing around those seasonality charts that show how August is typically weak.
My view on seasonality is it is fine if the indicators say we should go with it, but otherwise, that is not an input I value highly.
So, with that in mind, let's say this overbought condition develops into a decent pullback I can see how we could get sentiment pretty bearish pretty quickly, probably just as we were getting oversold again. But we'll deal with that if it shows up. In the meantime, I don't see much reason to change my view. We got overbought and it was time for a pullback or some chop and an increase in volatility.