That was quite a reaction Friday to an overbought reading accompanied by sentiment that had gotten too giddy.
But it wasn't just the sentiment and the overbought reading. It was also the fact that the number of stocks making new highs was contracting, not expanding, meaning the market had gotten too narrow.
As you can imagine, Friday brought us the worst breadth day in months, although it was really just a continuation of the lagging breadth in the last month, since the Russell 2000 Index peaked on Feb 22. I know I harp about this ratio, but the small-caps relative to the large-caps is now back to where it was in late December -- and is also closing in on the early January 2016 low.
Overall, markets where the Russell outperforms are healthier than those where it doesn't. This means there are more ways to make money on the long side, not fewer. Think of it this way: There are more soldiers relative to the number of generals.
The Russell did make a lower low on Friday. It was the only major index to do so. Even the Transports are still hanging on to that 10,000 level. There is some support between here and 1475 on the Russell.
As always, though, I focus on the indicators and not the charts of the indices. If I did focus on the charts of the indices I would have been bullish after Thursday, but I wasn't. Having just reached an overbought level it's too soon to discuss an oversold level. However, if we can get breadth negative this week then we should be back to an oversold condition again in early April.
For example, the McClellan Summation Index, which has been heading down for exactly a month now, needs a net differential of +2,100 advancers minus decliners to halt the decline. At +2,000 it is moderately oversold, at +4,000 it is extremely oversold. On March 7, the day before we made the low for the recent rally, it got to +3,800. So, another few days of negative breadth and we might get there again.
Still, there are problems, and not just the fact that the Summation Index is heading down or that the small-caps are acting so poorly or that the KBW Bank Index fell 10% last week. There are now almost 90 stocks making new lows on the Nasdaq. The Nasdaq was within a whisker of a new all-time high on Thursday, so there shouldn't be more new lows than highs at that point in a healthy market.
As for the KBW Bank Index, there is very little good to say there except that the collapse is so breathtaking that this index is getting oversold in a hurry. There is support around 90 and I would expect some sort of bounce from there. The measured target from that small top that broke down late last week (blue line) measures to the 88-90 area.
As for sentiment, it will come as no surprise that the Daily Sentiment Index (DSI), which tagged 95 for the Nasdaq on Thursday, clocked in at 81 on Friday. What surprised me was the put/call ratio stayed relatively low for such a big down day. At 89%, it was lower than it was on Tuesday of last week (96%), meaning fear was not prevalent. Fear is bullish, complacency is not.
The best news is that the put/call ratio for the VIX was under 20%. Often such low readings are bullish for stocks because it means far too many are betting on a higher VIX (lower stocks).
Finally, we need to talk bonds.
When we checked in on the yield of the 10-Year Treasury last week I noted there was a measured target around 2.45% and I couched it in a 2.40-2.50% range based on the big top (black line). The green triangle measures to the 2.40-2.45% area.
The Daily Sentiment Index chimed in at 93 for bonds on Friday so I'm in the camp that we see them rally this week.
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