SPX tested the 10/28 high multiple times again today. At one point SPX sat at new rally highs for over an hour waiting for buyers to show up. They didn't. Eventually somebody hit the sell button and others followed. Given the exhausted state of the market from yesterday this is not surprising. The breadth was +53%. as a few indexes closed in the green. New highs dropped again to 71. New lows increased to 52, Not the numbers of a strong rally.
The futures closed with a red bar, but are still above the 18 SMA. Will we get a confirmed break of the 18 SMA this time or do we bounce again?
The green count dropped slightly, but the red count increased considerably. Making a rally high with only 35% of the stocks with green price bars does not instill a lot of confidence in further upside. It would obviously be easy for the bears to take control on Monday if there is downside follow through.
The latest NAAIM number shot up quite a bit to 56. Still below the important 60 level. If the market rolls over they just added fuel for the bears. It is just short of amazing the sentiment shift. I read that the II sentiment survey had one of the biggest 4 week changes to the bulls-bears count in this bull market. The other similar instances were Oct. 2011 and last Oct. Those rallies were followed by 10% and 5% pullbacks respectively. The difference this time is we don't have anywhere near the same technical strength those rallies had. I heard the normally reasonably intelligent Josh Brown on CNBC claim this rally has repaired all the technical damage from the sell off. Really. All I can see is bigger divergences then we had to begin with. Here is a couple of internals to look at.
The NY composite bullish percent chart shows how much lower we are then the other two Oct. rallies with a similar sentiment shift. The difference between 2011 is very interesting considering the damage at that low was much worse then the current situation. The comparison to last Oct. is not so dramatic. Still despite the big bounce the count is barely over 50%.
This is the common stock only advance decline line. The Oct. 2011 rally had a big surge in breadth that took the indicator above the 200 SMA. Even though we were not as far away at the lows this indicator is still well below the 200. It is even negatively divergent over the last couple of weeks.
This is what fascinates me about the market. We got an extreme oversold condition and bearish sentiment and people piled back in. The ensuing rally has now convinced many market participants all is well. The fact is that the things the market was worried about have not been fixed. Revenue and earnings are still declining. China is still weak. They are so weak the PBOC did some easing operations. Right about now some of you are claiming that is bullish. I would remind you the FED started cutting rates in Aug. of 2007 before SPX made its final high in Oct. While that was bullish in the short term in the long term it fell 50%. The FED was cutting rates all through the 2000 bear market as well. Easing is not fundamentally bullish unless the economy is improving. That is not happening at the moment. Most of what happened was actually nothing but talk and the market rallied on it. That certainly is not fundamental. The bottom line is that market internals have not given us any kind of all clear sign. It certainly is not good that the transports and IWM are lagging so badly. Some time next month we are very likely to end up below the 200 DMA and people that piled in on this rally will be faced with a decision to hold or fold. My guess is they will fold because nothing has fundamentally changed. We are on recession watch in the U.S. and the global economy looks likely to already be in recession. There are plenty of valid reasons for people to sell. We will see if they do or not.
The market and sector status pages have been updated. Have a great weekend.
Bob
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