Remember when everyone thought growth stocks were dead and value stocks were hot? That was just over a week ago. It was also when the market reached its short-term overbought reading.
My Overbought/Oversold Oscillator is based on breadth. When breadth is strong it rises, when it is weak it goes down. But it's not really that simple. Value stocks had gotten ahead of themselves to the point that everyone thought growth stocks would simply roll over and die. Take a look at the ratio of the iShares Russell 2000 Value exchange-traded fund (IWN) vs. the iShares Russell 2000 Growth ETF (IWO) . That peak last week is the day we got overbought.

This ratio needs to turn up again. Why? Because when it is heading up, breadth is good. Breadth has not been that great in the last week, since we got overbought. It has been quite lackluster and Wednesday was no different. The S&P 500 rallied 10 points and the net breadth on the New York Stock Exchange was plus 175, while Nasdaq was negative.
Why must breadth, and by extension, value stocks, start rallying again? Because while breadth is still moving up, it has lost a great deal of momentum. The McClellan Summation Index now needs only a net differential of negative 600 advancers minus decliners to halt its rise. As long as this indicator is rising the majority of stocks are rising, but if it rolls over, then the majority of stocks roll over.
You see, indicator-wise, we're starting to see some signs of divergences. For example the number of stocks making new highs has tailed off. We are a far cry from last summer's high-water mark, but so far we can't even get over last week's high.

Tuesday we looked at the number of stocks making new lows on the New York Stock Exchange plotted on a 10-day moving average. We saw it flatten out. Wednesday we see that Nasdaq's is attempting to turn upward.
When it comes to sentiment, the 10-day moving average of the put/call ratio is still falling and hasn't gotten nearly as extreme as it did in the spring or summer, but it is no longer telling us there is fear in the market. I'd call it complacency.

The CNN Fear and Greed Index, which I prefer as a guide to show fear rather than greed (when it is under 20 it is a good time to be looking for longs), closed the day at 76. This is the highest reading since last spring.
The Daily Sentiment Index (DSI) for the S&P and Nasdaq sits at 80. That's complacency. Over 90 is giddy.
The DSI for the Volatility Index is back to 17. Under 10, and there's too much giddiness in the market. Under 20 and there's complacency.
So why must value stocks get back on the upside? Because if we continue down this road where those big cap, index moving, growth stocks take over, then it is likely the Summation Index will roll over.
Meisler's next column will appear Nov. 5.