Indicator Score Gets Stretched
This week, we've discussed a few of the indicators
that have flipped into bearish territory for the market. Nasdaq vs. NYSE
volume, OEX vs. Equity option trading, and some others are suggesting downside
for stocks.
These indicators have helped to push the
Intermediate-term Indicator Score to its worst level since last December.
There are usually three different times we see an extreme like this:
1. During a vicious bear-market rally
2. During the momentum stage of a bull
market
3. Everything else
When we get this kind of extreme under condition
#1, the typical result is a nearly immediate correction. Under condition
#3, we see perhaps another 1-3 weeks of modest rallying before prices give back
all those gains and more.
When it occurs during #2, there's really no
telling how far the market will go. The two most notable instances of this
were in October 2006 and December 2010, when stocks continued to plow higher for
a couple of months.
So where are we now? Well, in Oct '06 and
Dec '10, the S&P 500 was trading at multi-year highs in addition to showing
signs of momentum. Currently, we're not at new highs, but we have seen
some signs of momentum, like the
unfilled gaps.
Given the seasonality we're heading into, though,
it seems unlikely that we'll have a complete failure to see a pullback or at
least a consolidation.
Click chart for larger view
