I was asked an excellent question on Wednesday, before the market tanked late in the day, and I think others might have the same question. So, let me try to explain why it is with my Overbought/Oversold Oscillator overbought that I thought we'd get chop, instead of a good downside whack.
It is true the Oscillator is overbought. But it has been overbought for a week. Also recall that I tend to look for points in time when the Oscillator is dropping a long string of positive breadth numbers. In the last 10 trading days, breadth has been red five days, so that's a toss up, isn't it?
Sure, two of the days were barely red, but in addition to that, the more intermediate-term Oscillator -- the 30-day moving average of the advance/decline line -- wasn't dropping a bunch of positive numbers. In other words the overbought reading felt like it mattered but could work itself off by chopping, rather than plunging.
There is also the McClellan Summation Index, which had quite a decent cushion in that as of Tuesday's close it still needed a net differential of negative 1,500 advancers minus decliners to halt the rise. Usually the breadth begins to weaken enough that the Summation Index weakens before the indexes have a chance to pullback.
What happened on Wednesday from the opening bell was that breadth was incredibly weak. Even when the S&P managed to rally from down a few points to up nearly 10 breadth hardly budged and remained weak. That led to the weakest day for breadth in a month. It also means that the breadth was weak enough to halt the Summation's rise.
I noted the bond market to you earlier this week and late last week, saying I thought interest rates had gone up enough. I should have realized that this view was a very contrary view, because it turns out that folks were positioned pretty much on one side of the boat when it came to bonds and that side was the short side (rates rising). So the move in bonds on Wednesday was a terrific catalyst for stocks to fall.
The good news? It surely did what it was supposed to do, which was shake the too bullish sentiment. The put/call ratio moved up to .86 and the Daily Sentiment Index (DSI) for the S&P fell back to 75 and Nasdaq fell to 80.
I want to make one more point. That is that I have said as long as breadth is good and we don't get into a market where only mega-cap tech is working the market is okay. Wednesday was exactly the kind of market we don't want to see. Let's see what the end of the month brings.