This is the time of the year that everyone loves to make predictions about what the new year will bring for the market. That has never been something I am fond of doing. I have, however, looked back at the few times I have done it. And I got it wrong each and every time. Therefore I will not be doing one of those "prediction new year" columns.
Rather, I will note that breadth remains relatively strong. The Cumulative Advance/Decline line made a new high on December 31. This surprised me since the Russell is the same place it was on December 19. Typically, the two go hand in hand.
This also means the McClellan Summation Index is still rising. While just before Christmas this indicator needed a net differential of -2000 advancers minus decliners to halt its rise, that number is now at -700. So the cushion is smaller than it was a week ago, despite the continued rise in breadth.
Despite the good breadth, there has been some deterioration under the hood. For example, the number of stocks making new highs peaked on December 16, so the last two weeks have seen this metric fall off. It has fallen off enough so that the 10-day moving average of stocks making new highs has rolled over.
The chart shows the common stocks only, but the picture for all stocks is similar. If new highs on the NYSE don't start clocking in at 200+ for a few days in a row, this will not turn back up. The good news is that for now the new lows have not ratcheted back up.
Then there is sentiment. On December 26, the Daily Sentiment Index (DSI) for Nasdaq tagged 90. Then we got the requisite pullback. It is now back at 78. However, on that same day the Volatility Index's DSI fell to 10. The VIX then flew from 12 to 15. But the DSI is back at 12 again, so there is not a lot of room for this to fall much more without it being a short-term concern for the market.
The equity put/call ratio had three days where the readings fell into the 40s, which is simply a measure of giddiness not just complacency. One never knows if the whack the market saw on Monday of this week was sufficient enough to relieve the giddiness. I believe it was.
However, it's the moving averages of this indicator that give me pause. The 10-day and the 30-day moving averages of the equity put/call ratio do not get down here very often. Not all readings this low must result in a January 2018 type decline (as I have previously explained that was a rare event) -- there can be milder pullbacks -- but as you can see, the moving averages say complacency is still quite high.
So we need to monitor breadth (and therefore the Summation Index) since it has not yet rolled over. Breadth remains key.