I know: Everyone wants to talk about the banks. Not me.
I am going to go ahead and leave that talk to the others, because I don't know that I have any particular insight there, except that the Bank Index has hit a downside target in the $75-$80 area.
However, the small caps have a lot of banks in them and I do want to talk about the small caps. A few weeks ago, we looked at the chart of the Russell 2000 relative to the S&P 500. At the time, this ratio was at this blue arrow. The last week has seen a massive change as you can see. At the time I explained what we wanted to see was this ratio to come down and stabilize. You can see the stabilization in December. It had a spike low in September-notice at the October low this ratio was already rocking upward. Even in May it had the spike low and by the June low this was nowhere near the May low.
If you are looking for a sign the market is getting oversold I would look for stabilization in this ratio.
With that in mind, let's go back to the Momentum Indicator for the Russell 2000. We looked at it yesterday, but today I took the liberty of walking it down an additional 150 points. You can see, not much changes: it still turns up in about a week. When the indicator goes up, even when price goes down that is the definition of oversold.
This is not meant to pick the exact day, but a general time frame, and in my view we're heading into it.
My own Overbought/Oversold Oscillator finally stopped chopping around and headed lower on Monday. We're looking at Nasdaq's now, because generally that's where so many of the small cap names reside.
The Oscillator is based on the 10-day moving average of the net of the advance/decline line. So let's look at the math behind the indicator. When looking for an oversold condition, we're looking for a long string of negative numbers to be dropped. You can see this week is a coin toss. For example, even if the market rallies on Friday, it's unlikely the moving average can make any progress.
But take a look at what happens when Monday rolls around. Not only do we drop some pretty big numbers off the 10-day, but the 30-day moving average also has some decent red to drop.
For this indicator that means next week we are oversold, no matter what happens this week.
Is the market in great shape? It is not. Do the charts look good? They do not. And let me add that I hate that tech stocks have hung in there, because it doesn't really speak of panic in the market overall. But when the Daily Sentiment Index (DSI) for the S&P is at 15 (Nasdaq is at 27) and we are heading into an oversold condition, I will freely admit I have no idea what the next few days bring. But I think we are heading toward an oversold bounce worth playing. It's a matter of how we get there. So be on your toes.
