Are we there yet?
There is a sort of cycle that takes place in markets. First we get overbought, as we did in early February. Then we see the rally get narrower as we did in the second week of February. That's when breadth gets weak enough to turn the McClellan Summation Index down. During that same period (early February) the number of stocks making new highs falters. That's all part of the narrowness of the rally.
Then we start to see sentiment turn sour as we did in the third week of February. As sentiment begins to sour there are still those folks who want to buy stocks 10% lower. Then we get a rally that makes folks think okay, correction over (think a week ago). And then we get some actual news that is scary enough to take the market down hard (Silicon Valley Bank's failure). That's when the folks who wanted to buy 10% lower have a reason why they shouldn't buy.
Oftentimes this cycle takes place over the course of a month or two. But there are a few things that are common to all of these cycles, namely sentiment. You see, now six weeks into the decline folks have a reason why we shouldn't buy. After all, there was a bank failure. And y'know, the Fed finally broke something.
When we're overbought everything is fine and dandy, the news is generally good. How else does the market get to an overbought condition if we're not rallying? When we get near the oversold condition the news is generally bad. How else do we go down if the news is not bad?
For a few weeks now I have earmarked the mid March time frame for when we'd finally get some of those indicators back to an oversold condition. So let 's take a look where they stand because I expect within the next 1-2 weeks they will all be oversold.
Let's start with the Russell 2000 because it has been the weakest. What I do here is plug in lower closes for the Russell to see at what point closing lower sends the Momentum Indicator up instead of down. That is the definition of oversold, when the indicator no longer goes down on lower prices. This is a short term indicator. It is not meant to pick the exact day but rather a general time frame. This indicator turns up midweek this week even as I 'walk' the Russell down another hundred points.
The 30-day moving average of the advance/decline line should get oversold about a week from now. I realize it is the week the Fed meets, but I don't make the rules, or the indicators!
The aforementioned McClellan Summation Index is still heading down but now needs a net differential of +5,300 advancers minus decliners on the New York Stock Exchange to halt the decline. That makes it short-term oversold.
The number of stocks making new lows has soared which is bearish. Generally speaking, we need to see a rally and another trip back down to get a positive divergence (fewer new lows). The Hi-Lo Indicator is at .31. I expect it to be under .20 (oversold) by the end of the week.
The Volume Indicator is at 44%. In bear markets it gets oversold in the upper 30s/low 40s area. I expect it will be lower by the end of the week, making it fully oversold.
In terms of sentiment I expect all that complacency that crept back in last week ought to be wrung out again when the numbers are released midweek this coming week. We'll see if I am correct on that. The put/call ratio did surge on Friday, to 1.23, the highest reading in two months, so we finally got a little fear in the market Friday.
Finally the Daily Sentiment Indicator (DSI) for the S&P 500 is at 18. Nasdaq is at 25. I don't know what this coming week brings but I know if we tumble much more we are going to be oversold by the end of the week and those DSI readings are going to be awfully low (bullish). Now is not the time to get bearish in my view, I think it's time to see if the ingredients for a rally can show up in the next week or so.
