The market has spent the last two weeks rallying. The pattern has been to gap up and then sit for several days. At least that's the pattern for the S&P 500. Perhaps it will continue this coming week. But I will be watching for signs of whether this overbought reading gets digested or shows weakness developing underneath.
The first thing I will watch will be breadth. You see, when we look at the Cumulative Advance/Decline line using common stocks only, there has been no higher high over that late April high. This surprised me, since the banks had a big rally. The small caps joined the party. And heck, even oil stocks have had their day in the sun. So this needs to be watched to see if the overbought condition takes this down more.
We already know that we have not been able to see an increase in stocks making new highs, not on the New York Stock Exchange nor on Nasdaq.
So far, none of these short-term divergences has been able to halt the rise or even roll over the McClellan Summation Index. This indicator has been a good guide overall, because even if new highs are not increasing, it tells us the majority of stocks are heading upward, even if it is just in grinding fashion.
Late last week, I noted that I use the up-down volume for Nasdaq's McClellan Summation Index. I find volume to be more useful when it comes to Nasdaq. This indicator is still rising and Friday's surge in Nasdaq did very little to change that.
But even though net volume on Nasdaq was positive 500 million shares Friday (which isn't anything to write home about because Nasdaq was up 1.3%) it did not give this indicator a bigger cushion. By that I mean we came into Friday knowing that if net volume for Nasdaq was negative 500 million shares or worse, the indicator would stop rising. We come in Monday with that number now at negative 400 million shares.
Then there is volume in general. Back in mid-February, we looked at NYSE volume relative to Nasdaq's volume. The thinking is that when this indicator (blue line) gets so low there has been too much speculation in the market. At the time I showed you how this was the case over the last two decades. More recently you can see the extreme it got to in the fall of 2018 and in February (the two red boxes on the chart).
The current reading is now where it was as we headed into October 2018. It shows an extreme. And extremes can get more extreme, but it doesn't mean we shouldn't pay attention to it.
Right now, the market is doing enough group rotation to keep it from seeing much deterioration underneath, but there are some seeds of that showing up now. The question is whether or not the seeds grow. This week's overbought reading will be the first test of that.