Everyone wants a reason as to why the market pulled back on Monday.
Was Monday's decline folks anticipating the Fed meeting? Are folks squaring up before the Fed?
I would say it's because we're overbought and the Daily Sentiment Index for the Volatility Index had gotten to 9.
But why isn't anyone asking about the Dow? Remember when they fawned over it a few short months ago? It has been lagging in January, so now folks are silent. Or what about the transports? They, too, are down from two weeks ago. And the utilities are down on the year.
Ah, but you see no one cares about these things, because beloved tech caught fire. Remember when we used to hear about credit all the time? Yet the high-yield bond fund (HYG) (and the junk bond, one, (JNK) too, for that matter) peaked right when I left on vacation (don't blame me!) and is now in danger of making a three week low.
Both the NYSE and Nasdaq had the worst breadth readings of the year which makes this pullback a bit different than the one two weeks ago. Two weeks ago we had the S&P down 62 points on the day and net breadth was negative 960 on the New York Stocks Exchange. Monday the S&P 500 was down 52 and net breadth was negative 1,100. It's not a big difference, but it shows that there was more selling on Monday than there was that week following Martin Luther King Day.
The McClellan Summation Index is still rising, but now it only needs a net differential of negative 900 advancers minus decliners on the NYSE to halt the rise. Two weeks ago that cushion was negative 5,300 (and thus why I said we were overbought then). Yesterday's missive discussed the stalling out of stocks like the industrials and now it is evident in the breadth readings.
There is one other small difference to the selling from two weeks ago. Two weeks ago folks got bearish in a hurry if I use the various options ratios. That sort of bearishness did not show up on Monday. That means there is more complacency now (of course, beloved tech rallied).
Finally we should revisit the chart of the dollar. Two weeks ago it had just come down to the 102 area on the Dollar Index. Now we are still here. And if you turn the chart of the Dollar Index upside down you might notice some of the precious and industrial metals look like that. They are the inverse of the buck which is typical.
While I was away, the Daily Sentiment Index for the dollar got to 15. It is currently 28, but what if the buck rallies? That will probably not be great for breadth. Someone else will surely draw in the red line and say no big deal if the buck rallies to resistance, but my guess is the stock market will care. Maybe that's what the action in the industrials and transports are signaling?
Quite frankly, I would like to see the market rally one more time this week, because I think if we get another down day folks will get bearish in a hurry. Either way, there are some cracks developing.
