Regardless of today’s halting of NASDAQ stocks, buyers have been absent from the market tape and that’s the main source of the market weakness over the past few weeks – not deleveraging. There are probably multiple reasons for the absence of demand – an extended market, overbought conditions, overly bullish sentiment, the taper debate, and rising interest rates – but the grand sum of all of the reasons combined reveals only one thing: buyers are on vacation.
In the chart below, I look at the number of advancing issues, the number of declining issues, up volume, and down volume on the New York Stock Exchange (which was unhalted today) to get an idea of supply and demand. Focus on the down volume indicator. Note that in past corrections we saw high selling volume, especially late-May and during June. Also, note the drop in up volume over the past two months. If sellers aren’t hitting the tape, and buyers have vanished, then what we have is a buyer’s strike and a slow bleed in prices. Deleveraging messes tend to last longer and they’re more violent.
Volatility is nonexistent at the moment. The CBOE volatility index (VIX) is at 14.76. It’s trading off the bottom of its recent support just under 13, but it’s not acting as if we’re in a major correction. In past corrections, the Vix has spiked well above 20 and as high as the 40s (see 2011).
I’ve drawn two accelerated trends for the S&P 500 (blue-dotted line) above to show that we’ve broken the first accelerated trend, like many technical analysts have pointed out. The other thing you may notice is that the S&P 500 was up against channel resistance at 1700. So it’s not surprising to see buyers step to the sidelines. However, be very cautious of any market calls that stocks are headed for the next bear market. How many of those calls have been proven wrong over the past three years? We could come down to the 200-day moving average near 1554 and still be in an uptrend.
The consolidation is doing what it set out to do: trim the froth. Bullish sentiment has fallen towards areas that bottoms have occurred at in the past. 29% of the AAII membership are voting they think the market will be up in the next 6 months while 42% think it will be down.
Source: Bloomberg
RecessionAlert’s sentiment report shows that conditions for a buy signal have been met with the composite sentiment index below 0.40. For a buy to be generated, their sentiment index will need to rise above 0.40.
Source: RecessionAlert.com (with permission)
I continue to see stabilization in late-stage cyclical stocks in energy and materials. Most of my risk indicators are still painting a favorable cyclical picture. Investors continue to rotate out of non-cyclicals and high dividend payers to move into economically sensitive cyclicals. That’s not something you typically see at major market tops.
While conditions are ripe for bulls to step in, they continue to be hesitant. Even with today’s 2515 advancing issues on the NYSE, up volume remains unimpressive. Even with today’s 14 point rally in the S&P 500, we failed to close back above the 50-day moving average at 1658. The longer we stay below that moving average, the more likely we’re going to test the long-term moving averages of the 150 and the 200-day moving averages at 1598 and 1554, respectively. A short-term buy signal was triggered today when the percentage of S&P 500 stocks trading above the 10-day moving average moved up from 10.4% to 36.8%. The percentage of S&P 500 stocks above the 50-day moving average is currently 53%. The economic data over the last couple of days has been nice, but until we get some clarity in September over monetary policy, the market is likely to remain in a wide, sideways range. Don’t let the major market indices fool you though – funds continue to pile into economically-sensitive stocks because they continue to believe the economy is getting better, not worse.
