Considering some of the news we got on Tuesday, I was surprised the pullback wasn't more violent.
It really is beginning to sound like stimulus will not happen in the next few weeks, although everyone I see interviewed is convinced it will happen eventually. That was the same situation we had in August, and then September rolled around and markets second-guessed that view.
Then there was the vaccine news from Johnson & Johnson (JNJ) and the antibody news from Eli Lilly (LLY) : Both had to pause trials because study participants fell ill. A month ago, the S&P would have been down 2% on that news, but that's not what happened. To me it looked like a typical overbought pullback. For now.
I will change my mind and become much more concerned if breadth deteriorates, while the indexes rise. Breadth was negative by about two-to-one on Tuesday, but it wasn't enough to change any indicators. It did push the Overbought/Oversold Oscillator down from the overbought condition we saw late last week.
I will change my mind and become much more concerned if the number of stocks making new lows begins to expand in a major fashion. For now, the new lows remain modest. Yes, the 10-day moving average of the New York Stock Exchange lows ticked up, but as I explained two days ago, I believe that is just the math. Should the 10-day moving average still be rising late this week, I would get concerned, because that would mean we're clocking in at over 40 new lows daily.
For now, the McClellan Summation Index is still rising. It would take at least two more days of negative breadth like we saw on Tuesday to get it to stop going up so there is still a cushion there.
But I am disappointed in sentiment. I think it is still a little complacent. The put/call ratio didn't even get over .80 during Tuesday's decline. We'll see what the more intermediate-term Investors Intelligence bulls and bears look like when they are released sometime on Wednesday. I do expect the bears to have pushed back down, perhaps under 20%.
Remember, breadth has been terrific for the last few weeks. So what we don't want to see is breadth turn sour and the mega-cap tech stocks rise. That becomes a recipe for negative divergences and too much excess in mega-cap tech, which leads to swoons like we had in September.
For now, it still looks to me like this is a short-term overbought pullback after a nice run. I would expect after this pullback we'd try and rally again. Keep in mind my Saturday Twitter Poll was heavily skewed toward those looking for more upside and that tends to lead to choppy to down weeks.
