Why was there more panic in May when the market had two big down days than there is now? Why was there more panic in late August when the market had two big down days than there is now? I say this because the put/call ratio came mighty close to breaching 1.0 on Friday, but still failed to do so, yet at those two other points in time, it soared over that level easily.
Maybe it's because everyone was convinced at the time that May is such a bad month in the market so that had to be
high. And maybe in late August folks were still wary of a bad September, since it's such a bad month on the market. And maybe there is very little panic here because everyone knows that the market puts in a low in October, so they're all just waiting for the low.
Whatever the reason, it's important to note that this decline has seen breadth give up rather quickly, whereas other declines didn't do that.
made a high in mid-June, but the advance/decline numbers were bad one day and then just mediocre for a few more days. The next time the A/D figures made for poor reading was mid- to late-July, but that was already a month into the decline. This time around, the A/D figures have gone bad right away, making the decline look worse from a breadth perspective. But remember, tops take time to form. It's not much different from when a bottom forms -- there is a series of declines, with each one providing us less momentum on the downside. With tops, each rally provides us with less momentum. And the declines will pick up momentum as they occur.
This is evidenced by the oscillator. Notice how the oscillator never made a higher high on this recent new high. Notice how the oversold reading in August was a tad bit more (lower) than the oversold reading in late June. That's the lessening momentum. But now we're heading toward yet another oversold reading. For the
today, I am showing two oscillator charts. One is the chart I publish here each day, the other uses the advance/decline figures for common stocks only (excluding foreign stocks and REITs). Notice that the recent lift in bonds has put the regular oscillator far above its summer lows and the oscillator with common stocks only is closing in on the June lows. I expect that before the week is out, both oscillators will break below their summer lows and plunge toward an oversold reading.
For more explanation of these indicators, check out The Chartist's
So, yes, I expect an oversold reading later this week (and thus an oversold rally), but we will once again have a problem.
The intermediate-term indicators, having just turned lower 10 days ago, are not yet ready to reverse themselves and head higher. Of the two of the indicators I am thinking of, one is the 30-day moving average of the A/D line.
I've shown this chart several times in the past couple of weeks and will remind you that it will be difficult for this indicator to reverse course and head higher for about another three weeks.
The other indicator I have in mind is the McClellan Summation Index. The direction of this indicator is now heading down, and it will now take a monster rally (i.e., at least three days of 3:1 positive breadth) to reverse course. The other issue I now have with this indicator is that it never made a higher high on the recent new highs, and that would seem like yet another sign that momentum on this recent rally lacked the oomph of the spring rally.
Finally, it's not that the number itself is a terrible read, but I noticed that the
new lows picked up just a tad on Friday. Of course, going from five new lows on Thursday to 11 on Friday isn't a big deal. And neither is the fact that in the previous declines we only had a peak reading of 9 and now we have 11. It's that in previous declines the Nasdaq, even though it was 200 points lower, couldn't manage to expand the number of stocks making new lows, and here, at 1790, we find that number expanding. That's how we begin to see the weakening creep in.
I look for an oversold reading later this week, but until the intermediate-term indicators get back to oversold readings, I don't expect rallies will be worth buying.
Note: I'll be on vacation for the remainder of this week, and with next Monday being Yom Kippur, a holiday I observe, I'll return on Tuesday, Oct. 7.
Helene Meisler, based in Shanghai, writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions 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. She appreciates your feedback and invites you to send it to