We all get emotional when it comes to money. This is true in life in general, but especially in markets. I mean the stock market is this place where, when you are wrong, you lose money. And what's more, we all know that no one wins on every trade, so we all get the benefit of being wrong and losing money, even when the set up seems right. It happens and no one likes it when it does. That's what brings out the emotions.
I do my best to check my emotions at the door when I'm trying to decide what the market looks like. I have a button that reads, "When it looks great, it's too late." Essentially it means, everything looks rosy when things are going up and everything looks dreadful when things are going down. I have always found the fear of losing money is greater than the fear of missing out.
As I watched the market sink on Tuesday, I tried desperately to keep my emotions in check. As I put my pencil to the paper posting my daily stock charts where so many looked so crummy, I tried not to get emotional. And then I did my statistics, where I jot down positives on one side of the notebook and negatives on the other. Here's my unemotional report: The positive list still says we should rally in the coming days.
When we entered the week, I had gone through an exercise where I walked Nasdaq down several hundred points over the course of a week to find the day that the Momentum Indicator not only stopped going down, but headed up. That is the definition of oversold. Wednesday was the day. It is still the day. As a reminder: The exact day is not important, it's the time frame and we are in it.
Then I jotted down the number of stocks making new lows. Nasdaq had the fewest new lows since January 12. This is not a surprise, since all those spike lows from Monday are still in place. And spike lows tend to hold on the first trip back down to them. Monday, Nasdaq had 1,755 new lows. Tuesday, there were 282. Sure, maybe, Microsoft will force the market lower on Wednesday, or maybe the Fed will, but if the new lows continue to contract, that would help the case for an oversold rally, wouldn't it?
The Nasdaq Hi-Lo Indicator is at .07 now. It may go lower but, hey, zero is the ultimate support level, and it's where we've rallied from in the past.
For reference, the New York Stock Exchange is finally moving to its first real oversold reading on this indicator as it is now .20 and a reading under .15 is oversold for the NYSE. Just keep in mind that with few exceptions, this indicator tends to "double tap" in that we get a rally and come back down. In March 2020, that was not the case.
Nasdaq's Daily Sentiment Index (DSI) slipped to 17; it was 15 after Friday.If Nasdaq is down on Wednesday, it should get close to single digits (would be hard to get to single digits in one day).
I'm taking the emotions out of it and reporting that not much has changed, and I still think we should get an oversold rally in the coming days. And keep in mind that I continue to expect a volatile market in 2022 so do not get comfortable.