Just prior to my vacation, I noted the upcoming oversold condition. There were several different indicators, all were set to get oversold sometime between March 8 and Friday, March 15. Clearly the market opted to use the earlier date rather than the later one. I'd say it probably helped that there was a contraction in the number of stocks making new lows on Friday March 8th for the first time in that correction.
Now we've enjoyed an oversold rally so let's look at how the indicators have fared. I should warn you that while the rally is only four days old so far there is much to complain about. According to some of the overbought/oversold metrics there are still a few more days before we get back to an overbought reading so there is a window of opportunity for improvement, but as of now, there are divergences aplenty.
We'll begin with small caps since the ratio of the iShares Russell 2000 Index (IWM) to the SPDR S&P 500 ETF Trust (SPY) has faltered and continued to falter since February 22nd. This ratio now finds itself at the mid January low. On ratio charts I prefer to pay attention to the levels so a break of that level would be considered negative to me.
Nasdaq has plowed ahead, making new highs (over the high a few weeks ago) yet the PHLX Semiconductor Sector SOX has not. The ratio of the SOX to Nasdaq has not ticked up this past week, although a lower low is still quite far away (late January is a minor low, mid January is a more serious one). I have always thought of the Semis as a leading group so if it falters, that would be a problem for the market.
The Transports did finally rally but they have yet to get back over 10,400 which was prior support. They are close but there is still a lower high.
The McClellan Summation Index, which tells us what the direction of the majority of stocks is going, has not turned back up this week. It still needs a net differential of +1100 advancers minus decliners to turn up. To put that in perspective, Wednesday's rally where the S&P added nearly 20 points had breadth just shy of +1100.
Let's also recall that breadth had been leading this rally up until that mid February time frame. It's rallied well this past week, but the S&P took out its mid/late February high yet the cumulative advance/decline line stopped right there. It's close so I wouldn't nitpick too much on this, but it is a change from what we saw in the two month rally from the late December low.
While the NYSE saw a minor increase in the number of stocks making new highs (from 162 to 169) Nasdaq saw a decent contraction. There were over 140 new highs in February and now there are just over 80.
Sentiment-wise, the Daily Sentiment Index (DSI) tagged 88 after Wednesday's action, but pulled back to 82 on Thursday. Over 80 is a yellow flag, while over 90 is a red one. What this tells me is that if we rally from here the DSI is likely to get over 90 in a hurry so the runway may be short.
The bottom line is this rally needs to spread out from what we've seen so far this week. If it doesn't I'd guess we come back down again.
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