Back in the middle of May, Barron's put "Inflation" on their cover. At the time, I noted that it probably meant the inflation, or reopening/reflation stocks, were getting a little long in the tooth. If we use Energy Select Sector SPDR (XLE) as an example of a reopening/reflation group we can see the short term peak in energy stocks in mid-May, followed by a dip and a much bigger peak in early June that took this group down almost 20% from the highs.
Then about two weeks or so ago, Barron's decided to praise the mega cap tech stocks. At the time, I noted their prior love for the inflation names right near their peak and what it might portend for this beloved group. Thus far, the PowerShares QQQ Trust (QQQ) is only down a few percent from those highs but clearly some of the stocks in this beloved group finally had some real selling last week.
However, as you can see from the chart of the QQQs, it isn't much different than the chart of the S&P 500 that everyone is watching. That line, or the 50-day moving average - pretty much the same area - is what all eyes are on. Why? Do they think that if we break that line it will be such a major change in the market?
I have news for them: the major change in the market came a few weeks ago when the pattern of the last several months changed. The pattern where we only had, at most, three consecutive down days for the S&P and Nasdaq and then we moved to more. That was the change. Once the market changes minor patterns like that, we know there is a shift. Whether or not we break that line won't change a thing. The summer pattern is over.
So what if we break that uptrend line/50-day moving average? Will we finally get some panic? Will the CBOE Volatility Index finally get jumpy? Will the put/call ratio finally go to triple digits? To me those are the questions we should ask, whether or not sentiment shifts on such a break because right now that's a missing ingredient.
In the meantime my own Oscillator is oversold, both the NYSE and Nasdaq.
In addition, Friday's lower low in the S&P saw a contraction in stocks making new lows. Last Tuesday, Sept. 14 saw 56 new lows while Friday saw 30 on the NYSE. Over on Nasdaq, the peak reading for new lows last week (and for this current move down in September) saw 115 new lows while Friday saw 82.
So we have an oversold market with a minor positive divergence. We also have general gloom and words of caution abound from folks who just two weeks ago thought everything was fine and dandy. What we don't have is a high put/call ratio. As of yet, there has been no triple digit readings and the 10-day moving average is still below the August peak. We don't have a jumpy VIX, although a break of that S&P uptrend line on Monday ought to get the VIX jumpy. And we have yet to see a day where a large percentage of the volume is on the downside. If we got some of that, we'd have a great set up for an oversold rally this week.
And what of that XLE chart? A move over $50 would surely bring back the inflation chatter in a hurry, wouldn't it?