I think we should talk about the very short term vs. the more intermediate-term. Let's start with the short term.
I have exactly one indicator that shows an oversold condition. I use three indicators to find an oversold condition. One is based on time and a little bit on price. One is based strictly on price. And one is based on price or magnitude. The one based on magnitude is now oversold. Because, how can you have a decline of nearly 8% in the S&P 500 in under a week that doesn't show the magnitude is oversold?
That indicator is what it will take the stop the current decline in the McClellan Summation Index. Remember, when it is heading down, it tells us the majority of stocks are heading down. We now see that it will take a net differential of positive 5,100 advancers minus decliners on the New York Stock Exchange to halt the decline. When we consider that just over 3,000 stocks trade on the NYSE, this means it would take two days of huge advancers over decliners just to halt the decline. That's what makes it oversold.
The other two indicators do not show an oversold condition. Now, I am sure someone is going to look at the Overbought/Oversold Oscillator and say, heck, that looks oversold. And it sure does. But remember that the input here is the 10-day moving average of breadth. When we are staring at dropping a long string of red numbers, we are oversold. Right now in the last 10-days, there are five red and five green.
Tuesday we discussed the Nasdaq Momentum Indicator, which continues to show an oversold condition next week, not this week.
Now let's look at a few charts. The Dow Jones industrial average and the Russell 2000 are at their 200-day moving average lines, which should show some support. The S&P has filled a minor gap from the early December low and if you look at this longer-term chart, you can see there is some support not far below around 3,100.
The Transports have been downright awful -- recall they never confirmed the up move in the other indexes. They are now back to their October lows. They have also filled a gap, coming off the October low.
The PHLX Semiconductor Sector SOX, which you might recall everyone anointed the "new transports" right up there at the highs, has now fallen just over 10% in a week. They, too, find themselves at an uptrend line that has held since June.
Sentiment-wise, we saw the put/call ratio finally move. It closed the day around 135%, which is quite high. That's the good news. The bad news is that the 10-day moving average is not even close to telling us folks are panicked.
Finally, the Daily Sentiment Indicator (DSI) for Bonds got to 90 on Tuesday, so bond sentiment has finally gotten too bullish.
None of the intermediate-term indicators are oversold. That takes time. It also takes time for the sentiment indicators that were far too euphoric and complacent at the highs to cycle themselves back to too much fear. This leads me to believe we should bounce and come back down.