That was quite a sell-off we saw in the market's final hour of trading on Wednesday. But for the first time in weeks, breadth outperformed the indexes -- well at least it outperformed the S&P 500, something it did regularly in November and very little of in December.
It wasn't enough to halt the decline in the McClellan Summation Index, but at least it was a welcome change from the drooping and lagging we've seen so much of in the last few weeks.
About a week ago, I noted that if we could see the next several days choppy or down, or at least with poor breadth, we could see a short-term oversold condition near Christmas, and that is the way this is heading. You can see the Overbought/Oversold Oscillator dipped a toe under the zero-line this week. It's not the best oversold condition, but it is the best we have seen in many weeks.
Nasdaq is not as oversold, as it didn't even make it to the zero-line. I would also point out that the Daily Sentiment Index (DSI) for the Volatility Index is back at 13, so it won't take much to get it to single digits again.
Of course, the real action remains in the small caps, so once again we'll check in on the channel in the Russell 2000 fund (IWM) . You can see it remains intact. Once again I would remind you that if it fails to tag the upper line, it raises the chances that it can break the lower line on the next trip down.
I want to discuss the PHLX Semiconductor Sector index. It has lagged quite a bit, even to the point where it has a lower high.
Now take a look at it relative to Nasdaq and you can really see the underperformance since we left November and started December. Typically, this underperformance does not bode well for semis over the next few months. And usually it spills over into technology stocks, as well.
In this year we saw it twice. Look at late January (red arrow). The SOX underperformed and we know what came in February and March. Now look at the black arrow in August. The semis underperformed in the month, while big cap tech got all the love and we know that resulted in a 10% pullback in Nasdaq and the Invesco fund (QQQ) in September.
Notice that it is not that the SOX has to go down, it's that it must underperform. The SOX went up in August, just not as much as everything else in big-cap tech. I have always viewed the semis as a leader, which is why I focus on the this ratio. I also find it curious no one seems to care.