Friday was a textbook example of what I wrote about here a week ago. When the mega-cap tech stocks falter or sputter, everything else in the market can enjoy a rally.
When the mega-cap tech stocks enjoy a rally, however, they do so at the expense of almost all other stocks -- or the majority of stocks. On Friday the mega-cap stocks came alive for the first time all week and breadth was flat on the day.
Now I'm fine with breadth flat, because as we've discussed, the market reached a short-term overbought reading Friday, so it was time for most stocks to take a breather. I won't be fine with it if it continues and becomes a trend. I won't be fine with it if it is persistent enough to roll those intermediate term indicators back down.
For now, we have a short-term overbought condition in the market. The Nasdaq Momentum Indicator is overbought. My Overbought/Oversold Oscillator is overbought -- notice despite Friday's rally it still ticked down -- that's the loss of upside momentum in the majority of stocks.
Other short-term considerations include the equity put/call ratio's 10-day moving average. It has been under .50 for eight of the last 10 trading days. That means any uptick in it will send the 10-day moving average back up.
Sticking with short term sentiment, my Saturday Twitter Poll came in with 61% looking for the next 100 points in the S&P to be to the upside. Typically when it is that lopsided we get a move down or a chopfest. When the reading is either decidedly negative or split as it was last week with 49% looking for downside and 51% looking for upside, we get big weeks to the upside.
The number of stocks making new highs increased again on Friday, a positive. The number of stocks making new lows has been holding steady in the teens, forcing the 10-day moving average of new lows downward (also a positive). The math says the 10-day moving average of new lows could tick up this week, another reason we're short-term overbought. I will become concerned if that number rises much over 40 new lows.
As long as the intermediate-term indicators are not yet overbought, the routine should be a pullback and another rally. For now the intermediate-term indicators are still heading upward, and while we can no longer call them oversold, they are not yet overbought, nor have any of them rolled over.
Finally, I want to address the high put/call ratio for the Volatility Index. It has been over 1.0 for nine straight days, with Thursday's reading a spectacular 3.06. I have been keeping this statistic since 2008, and I have only seen it over 3.0 two other times. Once was in November 2009, where you can see it wasn't contrary at all, but rather all those folks betting on a lower VIX were paid handsomely when the S&P rallied hard.
The other time was late September 2011. The S&P had a fast whoosh down -- about 6% in a few days -- and then bottomed and rallied hard.
In any event, the 21-day moving average of the put/call ratio for the VIX is now the highest since I began tracking this more than a decade ago. Every one of those spikes you see was at/near a low in the market. Sometimes there was a short-term decline first, though. There is only one exception. The peak just over .90 on the far left (red arrow) was late April 2010, which was about a week before the Flash Crash in early May. Otherwise, this has been intermediate-term bullish for stocks.
I will not rationalize an indicator, but the narrative out there is that we could see a lot of volatility post election, yet this tells me folks are actually betting on a lot less volatility.