Repositioning Before the Selloff

Down near 8800-9000, I would become a buyer again, depending upon circumstances and conditions at that time.

Don't Fight the Rally

Several factors point to a modest but short-lived rally.

From a sentiment perspective, the bulls have gotten scared. AAII now shows bulls at 23%, down from 45% two weeks ago; bears measure 41.9%, a big move up from 24.8% over the same time period. That's simply too bearish, short term.

Other measures also suggest that the market has reached a moderately oversold level. The NYSE oversold indicator, where any reading below -50 is significant, measured 58.12; So too, the NYSE McClellan oscillator reads oversold at -256; anything below -200 is significant there.

Despite all these oversold signals, I remain concerned about the ongoing deterioration in both the internals and the macro environment. The advance/decline Line continues to soften, something that should not be occurring as the market rallies, and the Nasdaq 52-week highs/lows (See chart) also has flipped negative.

High/Low Flips Negative This is another sign of deteriorating technicals

Click here for larger image.

Source: Maxim Group, Barry Ritholtz

Longer-term trendlines also have broken and upside moves have been unable to sustain their gains. This is a clear sign that momentum is fading.

The Economic Environment Is Weakening

Now add problems in the macroeconomic environment to the technical deterioration. GDP has softened.

Personal income is not keeping up with price increases, just as consumers have lost the ability to do cash-out refinanced mortgages. (If you are looking for a reason as to why mutual fund flows have been so light, that's as good as any.) Money supply has also been throttled back by the Fed, and the yield curve is flattening.

We now have an oversold market that has not been able to rally on positive news. This reveals an underlying weakness, and possibly a decreasing appetite for equities. The market's complete inability to respond well to the major upside revision from General Electric (GE - commentary - Cramer's Take) last week suggests a market lacking leadership.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].