Weak breadth 7/31

The market finished strong today on the back of some well received tech earnings.  However, breadth was -57%.  The market rally has been thin lately.  IWM was down nearly 1% while QQQ was up nearly 2%.  Money keeps rotating back and forth between those two.  Some days when QQQ was down and IWM was up.  Very strange.

We still have one open gap up above.  Will we get up there and close it soon?

The green count is below 50 and slightly below the red line.  The short term indicator is also divergent.

The breadth chart shows the McClellan oscillator was below zero today and has not shown any real strength since early June.  I think I know why.  Look at the USA daily new virus cases chart.

Notice the new cases started increasing dramatically around the 3rd week of June.  I think this data may be weighing on the market at least somewhat.  However, a small handful of stocks like AMZN, FB and AAPL are holding up the entire market.  I also suspect the talk of another stimulus bill in congress is keeping sellers at bay.  Should they fail to pass another bill the market would probably head lower.

Under the covers speculation by individual investors is running rampant.  This is very similar to 2000.  I don't think there is any way to know how much longer that will last.  When the music stops grab a chair quick.  In the mean time, enjoy the rally.

Peace and good health to all.  Have a great weekend.

Bob

Extremely low put/call ratio 7/17

The test of the June high continued all week with no resolution.

Monday gapped up and tested above the June high, but reversed sharply in the afternoon.  SPX rallied back strongly on Tuesday.  However the last three days saw a tight range and no break out above the June high.  We will have to wait until next week to find out if this is a double top or a bullish cup and handle pattern.

The Monday reversal in QQQ was much more dramatic than SPX.  The high flying big cap stocks took a hit.  Notice QQQ has not made up the ground it lost in that sell off like SPX did.  If profit taking continues in the high flyers SPX will go lower. 

The green count jumped up to overbought levels on Wed. and SPX made no further progress.  The short term indicator in the bottom panel is still showing significant divergence from the June high.

The all company advance/decline line is showing a slight divergence.  Every internal I have looked at shows some negative divergence.

This chart shows the 10 DMA of the put/call ratio (blue line).  That line getting this low is usually associated with a sizable pullback.  All prior instances since 2009 have seen pullbacks.  The occurrence in late 2010 took a few months.  Most of the signals make a short term top within a few weeks.   This signal was at the June high so it has already been over a month.   Excessive optimism seems really odd in our current situation.  The fundamentals are not good, so why all the optimism?

There are technical reasons the market might turn down from here.  Divergences do not mean anything until price confirms them.  If the market breaks out above the June high on Monday all is probably well.  If the market turns down instead, I think we can expect a sizable pullback.  SPX would have a double top lower high pattern which sometimes leads to big declines (i.e. late 2018).  I think the resolution should happen early next week.

Peace and good health to all.  Have a great weekend.

Bob

Consolidation pattern continues, but 7/10

The buyers stepped up this morning and kept at it all day.

There was a tick accumulation signal today.  The first one since 6/5.  At least some people believe this consolidation period is about to end.  SPX is close to making a new rally high.  Will it follow through on the upside?  The internals are a bit suspect, but nothing the bulls can't overcome if the desire is there.

The green count is above 50, but well below overbought levels.  If the market turns back down this is a negative divergence.  If the market continues higher there is some room to run.  Same with the bottom panel, the short term indicator.  There is either a big negative divergence (it is below 50) or there is a lot of room to run before becoming overbought.

The breadth chart is not showing a lot of strength.

The 10 day advance/decline lines are positively crossed, but the volume lines are not.  The McClellan oscillator is still negative and has been most of the time for the last month.  The story is the same here.  Either we have negative divergences or lots of room to run before becoming overbought.

The key to what happens resides with QQQ.

In what seems ridiculous, QQQ is over 20% above its 200 DMA.  That is a fairly rare occurrence, but in the middle of a recession it is unprecedented.   It appears some investors believe a few big cap tech stocks are recession proof.  Take a look at some of the major stocks (AAPL, AMZN, NFLX, MSFT, NVDA, and TSLA) that are driving this move up.

Are you getting the picture?  Could these stocks be making blow off tops?  I think if QQQ had traded sideways like SPX I think the odds would be high SPX would be bracing for a break out.  The problem is the market cap of these extremely extended stocks is so large.  If they were to all correct at the same time as they often do, SPX would move down.  If you look closely you will see TSLA is up 50% in eight days (that is after doubling from the March bottom).   While these NASDAQ stocks are going crazy key sectors are being left behind.  All three Dow Jones indexes are below their 200 DMAs.  In addition, IWM and XLF are also below their 200s.  These indexes indicate that investors do not believe the recession is over. 

I believe I understand what is happening.  During the bull run from 2009 many retail investors avoided individual stocks and put their money in ETFs and index funds.  They have watched some of these stocks make huge runs over the last decade.  I suspect many people saw the crash as a buying op they did not want to miss out on.  As the stocks moved up rapidly FOMO took over and people starting piling in like mad.  I have heard stories of 10 year old kids day trading while home from school.  This is so much like 2000 I am suffering from deja vu.  A small number of stocks are driving the market higher while many stocks topped out a month ago.  Can this irrationality continue?  Yes it can, but will it?  It seems really crazy with the virus picking up all around the world and some businesses being closed down again.   We are coming up on earnings season.  Will the glamour stocks that have been rallying so strongly have good enough earnings to keep their prices up at these levels? 

A friend of mine recently mentioned this is a game of musical chairs.  When the music stops we better be quick to grab a chair.  I concur.

Have a great weekend.  Peace and good health to all.

Bob