What did you think of our first down day in nearly two weeks? Did you think the market handled it well and the selling was modest or did you think it spells trouble to come?
If you are in either group you are not alone. I saw many "new to the party" bulls think Thursday's action was just fine. At the same time I saw many who have been salivating for the market to go down licking their chops.
Here's what I saw: sentiment did not shift much. For example the put/call ratio did not soar, although it did ratchet up a bit. In fact, remember the VIX put/call ratio we discussed just yesterday? It fell right back to 22% so the higher VIX camp came back in a hurry.
In terms of breadth, the numbers looked fairly straight forward to me. A net decline of -700 advancers minus decliners was not bad for a day the S&P lost 10 points. My bottom line is that it appears to me we survived the first down day. But there were some nicks here and there.
Let's talk about what to watch. I want to begin with XLE an ETF to be long oil stocks. Recall that sentiment got awfully giddy with oil itself this week when the Daily Sentiment Index (DSI) scooted over 90. The decline looks relatively benign in that it stopped right at resistance and is pulling back. But notice that Thursday's decline took back three straight days of gains.
There is support all the way down to that green line but ask yourself how comfortable will you be if it pulls back there? My guess is not very since it would essentially take it right back to where it was in early January.
Then there is the SOX which has been terrific in the last week or so. Or has it? In reality that gap up two weeks ago is only a few points lower than where it is now. But this can pull all the way back to test that line, can't it? How many do you think would feel comfortable with a 50 point -- that's 4% -- decline in the SOX?
XLI, everyone's new favorite group to be long the industrials, has been awesome but it looks to me like it could fall to $74 (and be buyable) or go to $78 (and be where you'd sell). So at $76 it's done nothing wrong and had no selling on Thursday but does the set up look great to you?
My point is Thursday's action gave us nothing definitive. To me what it did was start to weed out the stocks that have been limping higher or lingering. I don't think there was enough selling to turn folks bearish so instead what it likely did was ease off some of the complacency that had set in.