When the market has been on a rapid rise such as it has these last six or seven weeks -- and it has done so from a point where folks were extremely bearish at the lows -- we tend to see a Wall of Worry develop. Having been burned buying the dips/lows in late October and late November and being shaken out the desire to get beaten up again is low.
I have not minded this Wall of Worry for the last several weeks because the intermediate-term indicators were not overbought. However after the close on Thursday, most of these indicators will step into overbought territory. I had thought if we could rally Wednesday and/or Thursday and get over the 200-day moving average of the S&P we'd see sentiment get a bit more complacent. But Wednesday's action did not help that because we chopped with a downward bias.
You already know about the intermediate-term Overbought/Oversold Oscillator and how it will reach its maximum overbought reading after the close Thursday. Now let's move to the Volume Indicator. It is now at 59%. It has a bit more room to move and might make it to 60% or 61% in the next few days but suffice it to say it is now in overbought territory. So I looked back to see the last time it was this high.
That was November 2014 (blue arrow on the S&P chart). What I find fascinating is that we had a V bottom then too. I also find it fascinating because I have shown this chart (see Monday morning's column) as a possible scenario for what might happen this time, when we rallied straight up from a low, made a higher high and then 10 months later we were right back at the low again.
What is also interesting is that after a torrid rise for six straight weeks the market did not turn down. It chopped about, with one sharp down day and right back up. It did that for two weeks. And then it came down harder a few weeks later.
Now let's look at the VIX from then since my call has been we should expect a higher level of volatility in the next few weeks. The shape of the VIX looks similar then as it does now. The big spike and the subsequent decline and somewhere around week 4 the little spike up and another retreat (point A on the chart). And then in 2014 it made a lower low, had another small pop in late November before coming down one last time. It has made a lower low now as well.
I am not yet sure about the big drop thereafter because we would need some of the breadth indicators to roll over and they haven't done so. The McClellan Summation Index still requires a net differential of -2,200 advancers minus decliners to halt its rise which is a decent cushion. Yet two days ago it needed a net differential of -3,500 so one mildly negative breadth day took a lot of the plump out of that cushion. If breadth's great performance slows, these indicators will roll over.
I am still looking for a rise in volatility.
