This Market's Trend: One Step Down, Another Step Up

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If you don’t like “V” bottoms, then you cannot complain about what has transpired in the market over the last six weeks, can you? I mean, this is surely not a “V” pattern, is it? It’s stair step. It keeps pulling back and rallying. We looked at the chart of the S&P 500 the other day, but it’s in the Invesco fund (QQQ) too.

I grant you, the QQQs are coming into some resistance in this $310-$315 area, both from the early June high and the March lows, so it makes some sense that they take a breather from up there, doesn’t it?

Why would they take a breather aside from the resistance? Well, because we are now into an overbought condition with breadth having been positive for eight of the last 10 trading days (on the New York Stock Exchange).

Two weeks ago, I noted that in July, Nasdaq’s net volume had had a mere two days of negative readings (this is up minus down volume). As the month comes to a close, that count is up to five. In the entire month, there have only been five days with negative breadth on Nasdaq. Yet, you know what stocks I get asked about all the time? Energy.

But that does leave the market short-term overbought as it heads into resistance.

What surprised me most though is sentiment. The anecdotal chatter is bullish, but the statistics are not. We’ve already discussed the put/call ratio and how high it has remained, but let me note that Thursday’s reading of .94 was the lowest since July 15 and .94 is still high. I mean the QQQs are up from $280 since then.

It’s not just the options ratios. The National Association of Active Investment Managers (NAAIM), which takes their survey on Wednesday morning, shows their exposure at a mere 42. Look at how it surged from 35 to just over 80 in March. And now it has limped its way upward from 20 to 42.

In fact, one of the few signs I have that folks are complacent is the VIX, which finally made a lower low than last week during Thursday’s trading. The Daily Sentiment Index (DSI) is now at 17, so should July end on a high note and the VIX fall, we could see a low DSI for the VIX coupled with a market at resistance and an overbought reading as we come into the first week of August.

Finally, let me report that the McClellan Summation Index crossed over the zero-line for the first time since January on Thursday, and it is still rising. It now needs a net differential of a net negative 4,400 (advancers minus decliners on the NYSE) to halt the rise. That makes it a good cushion, but it also makes the market overbought (+ or – 4,000 is overbought/oversold).