When the market hit a short-term oversold state just after Labor Day, we had plenty of downside to keep up. What we don’t have are medium term indicators in oversold condition. What has changed in the last two weeks is that these medium term indicators are heading towards oversold condition while after that they were just coming out of overbought condition.
Let’s start with the 30 day moving average of the advance/low line, which is what I use as my medium term overbought/oversold oscillator. Two weeks ago it was hovering at the zero line. You can see that it is now approaching its lows in June and July. By my estimation, it will be fully sold out sometime next week, the last week of the quarter.
The volume index, bound for September was at 52%. Today it stands just under 49%. While this may not seem like a huge move, you can see on the chart that the overbought is in the mid 50’s and the oversold is from the low to the mid 40’s. This means that it is also heading towards an oversold state whereas a couple of weeks ago it was just coming out of an overbought reading.
McClellan’s Summing Up Index is still trending lower – it never showed up to rise in the first week of September. However, it took a +5,300 net lead minus the NYSE losers to stem the slide as we entered the last month of the quarter (which put us oversold in the short term). This scale now stands at +2,900. That’s still a big number but if you think of it like going up the hill, in early September you were starting at the bottom of the hill and now you’re halfway up the hill. The trend is still down but it will take less to stop the trend.
Hi-Lo index in mid-adolescence. This is oversold under 0.20. Can it go down? Sure, all of these indicators can get more oversold; Actually, they should but I like to prepare and anticipate what might happen next. I remember, I spent the first part of August walking away from a bout of the ups and downs to come. It didn’t arrive until later in the month, but the stock started behaving badly weeks ago. Remember that even though the Nasdaq is up 5%, the number of stocks hitting new highs can’t expand, peaking at just over 100 in late July.
Feelings are bearish I don’t need to tell you. With that, I will announce that the Nasdaq’s Daily Sentiment Index (DSI) now stands at 10. The S&P stands at 11. These are the kinds of readings we saw for the CBOE Volatility Index in early August. Any further drop in stocks would definitely take it to number one making it extreme.
In addition to lower readings for stock indexes, the bonds stand at 14, after hitting 12 twice last week. And don’t forget that the dollar index was 93 two weeks ago. Several cross coins were in one digit.
We have the FOMC meeting next week, which will clearly be what moves the markets. If you take a step back and look at the S&P 500’s weekly chart from June, note that it took a few weeks of 100 points up and down before the market found its footing, enough to enjoy the rally. Jumping on the bear train is now late. I suspect by early October the bears will be heading towards the bulls fence.
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