Without Divergences, It's Just an Oversold Rally

Are folks more afraid of missing the next rally than they are of being in for the next decline? I ask because the last time I recall so many folks on RealMoney all looking for a bottom and then calling for a bottom and then loving on the bottom was June 2006.

Folks, this is an oversold rally. There have been no real positive divergences to speak of yet, as new lows surged again yesterday. And the oscillator doesn't even have a higher low yet.

And sentiment is the topic du jour. We can discuss the VIX first, since it seems to be the question of the month. It got a little bit jumpy yesterday when it moved up and turned down. I saw Jordan Kahn's explanation of the action in his post yesterday in Columnist Conversation, and I wouldn't argue the point too vehemently, but I would ask the following questions:

• If everyone is so bearish, then why haven't we seen an index put/call ratio over 200% yet?
• If everyone is so bearish, then why haven't we seen an equity put/call ratio over 100% yet?

I won't harp away about the 30-day moving average of the equity put/call ratio -- I've done that probably about a hundred times already -- but I'll show you the simple 10-day moving average of the put/call ratio. You can see for yourself that it's not even as high as it was at the November low, which we've already discussed was a low but not a very good one.

I mean, really, look at that chart and try and see some fear in it -- you can't. The scariest part of that chart is how little it moved in the month of June.

I've seen entire discussions about the month of June and how it was the worst month since the Great Depression (or was it since the bear market in the '70s, or was it since the bear market in 2000-02?). Whatever it was, if it was the worst month in the market in that long, then why is this moving average of the put/call ratio hanging around? Why isn't it moving up?

In fact, doesn't this little sideways move in June look somewhat similar to the sideways move we had in September when the moving average was heading down? As if it was just a stopping-off point to have a rest before it continued on its way.

Now, the good news is that the Investors Intelligence readings have finally moved back to the levels we saw at the March low, and those readings come along right as the market has gotten oversold.

Yep, as I've been harping away for weeks now, I expected we'd find the market oversold on or about July 1, and that typically leads to some sort of bounce. If you go all the way back to the discussion I had regarding the 30-day moving average a week or so ago, you will see I discussed the potential an oversold rally this week with a bigger potential in mid-July. I'm not saying we're not going to enjoy a rally, but once again I will remind you that you will not find me saying this is the low. I can assure you, I will not know if it's the low until well after the fact.

Right now, we have an oversold rally that came without positive divergences.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

Helene Meisler writes the newsletter "TheStreet.com Top Stocks," which gives readers daily investing ideas based on a study of technical analysis.

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Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.