There were no rocket emojis nor were there "stonks only go up" comments on Tuesday. I suppose when the market has no follow-through and you expected it to, you tend to be disappointed.
We began the day with a market not yet fully overbought, but with sentiment far too giddy. While sentiment might have eased up a smidgen, we're still in that same place. So far, we got one day of chop.
Let's talk for a minute about the math behind the Nasdaq's Overbought/Oversold Oscillator, because I have spent much more time discussing this Oscillator than the New York Stock Exchange's. The Oscillator is the 10-day moving average of the net of the advance/decline line. That means breadth must be good for the Oscillator to rise with any oomph.
What we have with Nasdaq's is a 650-point rally in three trading days and the Oscillator is still under the zero-line. That is very unusual. Yet, here I am noting I still think we could get one more rally into the end of the week. It's the math.
Ten trading days ago, Nasdaq's breadth was a net negative 3,080. That is a lot, considering about 4,000 stocks trade on Nasdaq daily. It is my view that such a reading is hard to beat. By that I mean it's hard for me to imagine us seeing a net negative breadth reading of 3,080 or more. Anything less than that should make the Oscillator rise. Now, imagine if breadth is positive on the day. That's the math.
On Thursday Nasdaq's breadth will drop a net negative 2,200. So, we have two days of big negative readings to drop. That doesn't mean the market must rise both those days, but the momentum is still on the side of the bulls. After that, there are not many big negative readings to drop and that is why/how we get overbought at the end of the week.
It's been a while since we've looked at the Nasdaq's McClellan Summation Index, where I use volume instead of breadth as the input. Would it surprise you to know it hasn't seen an uptick since February? Not one. That's the blue line on the chart.
So once again, Nasdaq had a 650-point rally last week, which is 5%, and this indicator, which tells us what the majority of stocks are doing, has continued on its downward path. It will require a net differential of up minus down volume of 2.4 billion shares to halt the decline. To give you an idea, last Thursday's big rally netted it 1.5 billion shares. Monday's was 365 million shares. So Nasdaq can do it, but it's going to take a herculean effort.
I still think there is a chance we rally one more time into the end of the week, but I think the latter part of April will see a market that is choppy at best and more likely due for another pullback.