The Market
For the last few weeks, we have witnessed a market that has been thrown several items of
negative news, and yet the S&P 500 is approximately 4% higher than it was at the end of
the third quarter.
At the end of the third quarter, we saw the peak number of stocks making new lows (still
fewer than June but for this leg down from August it was the peak—so far). At the end of
the third quarter, we saw an extreme oversold condition. And we saw the small caps refuse
to make a lower low.
We saw the Dow come down to the bottom of the channel that has been in place all year. And
we saw the 30-day moving average of the advance/decline line get oversold.
In the last week, we saw the McClellan Summation Index turn up. It’s still quite fragile
but it is the first time we had it hold steady during a pullback since it turned south in
August.
In this period of time, we have seen yields rise from 3.6% on the 10-year Treasury to
4.2%. So that begs the question, are stocks ignoring the bonds and is that bullish or are
stocks ignoring the bonds and that is stocks whistling past the graveyard?
I think bonds should rally. But I said that on Wednesday evening and I have been wrong for
two days now as bonds have collapsed. I would however note that iShares 20+ Year Treasury
Bond ETF (TLT) had the highest volume since early May on Friday.
The iShares Core US Treasury Bond ETF (GOVT), another ETF to be long bonds, had its
highest volume in at least five years, and at that it was triple what the prior highs
were.
The iShares MBS (MBB), an ETF to be long MBS (mortgage-backed securities) saw volume
explode to nearly five times what it had been late last week as well.
Is the high volume capitulatory? Maybe. We never know until it is well after the fact but
when I see the Daily Sentiment Index at 9 for two consecutive days and I see that kind of
volume I believe that bonds need a relief rally.
And if bonds can rally – and hold it for longer than a few hours—then stocks can rally
some more as well, although I do not think we’re looking at a market that screams straight
up. Since we made that low in late September, it’s been a very choppy market, two steps
forward, two steps back.
I would note the Invesco QQQ Trust (QQQ) crossed the line. If that can hold on, then the
gap fill at $280 is the next challenge.
The S&P 500 filled the gap but you can see that 3,800 (blue line and early October high)
are its next challenge.
I will be focused on a few indicators going forward. First is sentiment. We no longer are
at peak bearishness. I showed that to you when we looked at the National Association of
Active Investment Managers Exposure. They are up to 43% and that was prior to Friday. The
Investors Intelligence bulls were at 31% last week (up from 26%) so they are likely to
move up quickly. Their peak bullish reading in August was 45%.
The 10-day moving average of the put/call ratio is not at the top of the page (shown here
Thursday evening) but rather in the middle of the range already. Friday’s equity put/call
ratio was 0.58, which is the lowest in a month. It tells me folks want to believe so the
conversion could be quick.
Then there is breadth. On Friday, breadth was lackluster relative to the rally. At +1,320
for the New York Stock Exchange, it barely recouped what it lost on Thursday. We do not
want to see the Summation Index roll back over.
Finally, I will watch the CBOE Volatility Index, since it was not down on Friday and the
last thing we want to see is a high level of complacency.
New Ideas
Since Freeport-McMoRan (FCX) – Get Freeport-McMoRan Inc. Report didn’t break down, I have my eyes on Southern Copper
(SCCO) – Get Southern Copper Corporation Report because it should at least make a run at $52.
Today’s Indicator
The new highs did not expand on Friday. That’s another thing to watch for: we need to see
the new highs expand.
Q&A/Reader’s Feedback
Helene welcomes your questions about Top Stocks and her charting strategy and
techniques. Please send an email directly to Helene with your questions. However, please
remember that TheStreet.com Top Stocks is not intended to provide personalized investment
advice. Email Helene here.
Micron (MU) – Get Micron Technology Inc. Report has been here before, in early August. By that I mean bumping up against
a downtrend line and near the top of the recent trading range. It’s got decent resistance
at $59-$60 but cracking that line would be a big deal. If the stock trades under $54, I’d
say it’s unlikely to do so, otherwise it gets a chance.
SPDR Gold Shares (GLD) – Get SPDR Gold Shares ETF Report has a double bottom potential here. I would think a rally to
$157-$158 is doable since that would fill the gap and bump against the downtrend line. The
obvious stop is a new low.
ChargePoint (CHPT) – Get ChargePoint Holdings Inc. Report broke down and should now measure all the way back to the spring
low. However, it has some decent support in the $12 area so I would think a rally is in
order first. If it can get to $14-$15, I’d sell it there.
BASF SE (BASFY) is attempting to make a bottom. I would be a buyer on a pullback to
the $10.50 area. If it opts to keep rallying, then I’m a seller in the $12.50 area.
My inclination is to be a seller of Royal Caribbean (RCL) – Get Royal Caribbean Group Report if it can get back into
that $55 area.
Read More: Stocks Can Rally if Bonds Rally