I find myself staring at the charts of the Overbought/Oversold Oscillator. It's so hard for me to believe that breadth has been positive for eight straight trading days and this indicator has barely lifted itself off the zero-line.
I will grant you that Nasdaq's breadth hasn't been nearly as good with only five of the last 10 days in positive territory, but the New York Stock Exchange is unusual.
I find myself wondering if this last run in the S&P 500 is similar to late April and late July, where you see the red arrows, because in those two instances the Oscillator had been unable to lift itself up very much. So I took another look at breadth to discover there was a minor similarity in that in April it had eked out a higher high and in July it was choppy, but steady. In other words, it wasn't a major divergence.
Next I moved to the McClellan Summation Index, which is derived from breadth. The way I use this indicator is I look at the direction it is going, because it tells me what the majority of stocks are doing: up or down. As I noted last week, it had finally turned up. But while it hasn't made a lower low since June, it has not made a higher high in almost a year.
In both the spring and the summer -- as shown in the green boxes -- this indicator had turned south at least a week or two prior to the peak in not just the S&P, but in breadth. Therefore that means it had better see some follow-through to the upside soon, because if it turns back down that would be problematic. Just one or two poor breadth days will turn it back down.
If you're wondering why I am concerned it might turn back down, that's because as soon as Barron's put small caps on the cover, they started underperforming vs. the large caps, as seen in the green boxes. The ratio couldn't even cross that big downtrend line that goes back 18 months (not shown) despite small caps outperforming for the last several weeks.
As if that wasn't enough, the 10-day moving average of stocks making new lows on Nasdaq has ticked up again.
Then there is the extreme reading for the Volatility Index put/call ratio. It was 198% on Friday. That's quite a heavy bet that the VIX will go lower. And, yes, it is curious that in the last month we have seen five such high readings. The last time we were this high, though, was just prior to a two-day pullback in the stock market in mid-November. Oh, it was no big deal, we fell perhaps a percent all in over the two days, but with the Oscillator so low and the Summation Index so fragile, it is surely something to watch.