Let's take a step back and see how the market got to where it is and from there we can try and discern how it might play out from here.
Breadth, which to me is the lifeline of the market had been leading. But in early January it began to falter a bit. It was never enough to turn down, but its legs were getting wobbly. Then it began to lag, causing the McClellan Summation Index to flatten out and two weeks ago this important breadth indicator turned down.
Banks relative to the S&P 500 peaked in mid-December. The semiconductors relative to the Nasdaq peaked in November. The Russell 2000 peaked mid-month, as did the Transports. Both indexes never surpassed their October 2018 highs.
Economically sensitive stocks began heading down. Interest rates peaked near Christmas and have spent the entire month moving lower.
The number of stocks making new highs had been cruising along as well. But by mid-month that began to lag. And the number of stocks making new lows picked up.
Two weeks ago the 30-day moving average of the advance/decline line, an intermediate-term overbought/oversold oscillator got overbought. The Volume Indicator got overbought when it pushed to 56%.
Two weeks ago the Investor's Intelligence saw the bulls just shy of 60%. Two weeks ago the American Association of Individual Investors saw the four-week moving average of bears trough and turn up. The put/call ratio had gone from low readings here and there to consistently low readings, enough to take the moving average lines down to extremes.
The Daily Sentiment Indicator (DSI) went from a reading over 90 every few weeks to one every few days. Then two weeks ago, the Citi Panic/Euphoria Model pushed its way into Euphoria for the first time since late April.
Now we've finally gotten a correction. A typical sequence is for us to get short-term oversold, have some panic, rally and come back down, which ought to set the stage for another rally.
When we look at what it will take to turn the McClellan Summation from the current down to up, we find we need a net differential of positive 3,500 advancers minus decliners. That puts it in oversold territory. Over positive 4,000 and it's in extreme oversold territory.
When I do a "what if" exercise for the Nasdaq Momentum Indicator, I walk Nasdaq down 200 points in the next week and discover that Wednesday of this week the indicator stops going down and heads up, which is the definition of oversold -- a loss of downside momentum.
My own Oscillator is tougher to pinpoint because we need a long string of negative breadth days and we simply don't have that. But you can see how far down they are now.
The intermediate-term oscillator is not close to being oversold, though. This is one reason we typically see a rally and back down; it needs time to set up. The Volume Indicator has come down quite a bit; it is now 49%. Mid-40s is oversold and low-40s is extreme oversold. This is an intermediate-term indicator.
On the sentiment front the put/call ratios haven't shown us much panic, but we did see some lifting late last week. Friday's Equity Put/Call Ratio was 74% which has managed to get the moving average line moving up with some vigor for the first time since September.
As I noted last week, the Volatility Index (VIX.X) is finally on its way toward jumpy. The DSI for both Nasdaq and the S&P are around 50, which makes them neutral but at least we can now say the complacency has been wrung out.
The AAII bulls backed off 13 points and bears jumped 12 last week, so there's been a shift there. The Investor's Intelligence bulls fell to 52% from 59%, so they ought to fall further this coming week.
The Citi Panic/Euphoria Model though is still in Euphoria land, but ought to start coming down. Remember it takes time for folks to go from bull to bear and vice versa.
We ought to get a short term oversold bounce by midweek this week after which I would expect to see us come back down to get the intermediate term indicators to an oversold condition.