Let's talk about the rally.
You know the rally in the big-cap tech stocks. The one I thought we'd get last week before we reached the overbought reading. Well, we finally got that catch-up that I'd been looking for, but my timing has been wrong.
But still, let's talk about the rally. It was clearly more evidence that we reside in an either/or market, because those index-moving names moved while everything else sat it out. In fact, the S&P rallied 27 points on the day with breadth a net negative 375 issues. Not only that, 60% of the New York Stock Exchange volume was on the downside. That's unimpressive, but what it really tells us is the majority of stocks are responding to the overbought condition.
The negative breadth now has the McClellan Summation Index heading decidedly down. It will now require a net differential of advancers minus decliners on the NYSE of positive 1,500 just to stop the downtrend. It's been nearly two weeks since we've seen breadth that strong.
But let's cycle back to Nasdaq. Last week I did an exercise, where I plugged in higher closes -- 100 points each day -- for Nadsaq and we looked at the Nasdaq Momentum Indicator to see how it would fare. I noted that after Friday (March 19) this indicator would stop going up, which would tell us it was overbought. With Nasdaq's 162 point rally plugged into the Momentum Indicator for Monday's trading, you can see even that sizeable point gain took the indicator down, not up. That is overbought to me.
As an aside, I was asked if I could do the same exercise for the Russell 2000, finding when it might be oversold. I used a very small number, taking the Russell down 10 points a day and discovered that it will take until this coming Friday for that index to get oversold. If the Russell sells off more this week I will show you the math and the chart.
In the meantime, however, I look at these statistics and my view for the week is unchanged, I still think we should see a pullback. I am even more convinced when I see that the Daily Sentiment Index (DSI) for the Volatility Index has slipped to 12. The VIX finally broke 20, which I suppose folks will consider bullish for stocks, but that DSI says take the VIX much lower and the DSI will get to single digits. And a single digit reading tells me it will be time for the VIX to go up, not down.
Speaking of DSI's at single digits, recall last week's DSI for bonds at 9. The bonds have rallied and everyone has gone radio silent on them. So, I ask you to look at a chart of the iShares Barclays 20-plus Year Treasury Bond (TLT) . That is one steep, but solid, downtrend line. I don't know if it crosses it Tuesday, but I do think we will see TLT cross that line, likely before the week is out.