Let's talk about the chop. And we might as well talk about the frustration the chop is causing.
Oh, sure, you say to yourself, what chop? The S&P 500 goes up every day. That's only partially true. The S&P has not had consecutive red days since early October, so it does seemingly go up every day. But step back and look at the chart. We had that terrific Nov. 1, with a little follow through on Nov. 4, but ever since then it's been chop. That's the black box on the chart.
Take a look at the blue boxes now. We had chop both times that lasted weeks. In July, it was nearly three weeks and in September it was about two weeks. In each case look at how it resolved. In August, we saw four down days. That was it. Sure we went up and down after that, but the decline felt like a plunge, yet the bulk of the decline was in four days and those four days saw sentiment turn from bullish to bearish in a hurry.
In September, it was two down days, and that was also enough to turn sentiment from bullish to bearish.
Not all chop periods resolve to the downside. The green boxes show chop periods that resolved to the upside. That's why we look at the indicators. And many of the indicators started rolling over late last week. But I ask you again to look at the blue boxes, where we chopped for weeks while the indicators rolled over.
What happened in those cases was when the S&P gave way, it did so at the end of the correction, or sideways move (chop). It was not a fresh new leg down. That is actually quite typical. The chop and sideways action keeps folks thinking "the market can't go down" and then when it finally does go down, they panic and they do so quickly, which is why we tend to see harsh down days at the end, not the beginning.
While the S&P has not had consecutive down days in five weeks, breadth has been red for four of the last five trading days. I bring this up because, if this chop should continue, and, late this week or early next week, we get a harsh down day or two, it would happen as we're heading into an oversold condition.
Just take a look at how far down the Oscillator has come. Both the New York Stock Exchange and Nasdaq have seen their Oscillators not only make lower highs vs. September, but they are both hovering just above the zero-line.
Finally take a look at the chart of the iShares MSCI Emerging Markets Index fund (EEM) , an exchange-traded fund to be long Emerging markets. The blue boxes show topping action. In each April and July, after the initial plunge the re-rally fell short of making a higher high. We have now had the initial plunge. In February (twice) and March the re-rally went on to make a higher high (green boxes). This seems to me something to pay attention to.