The last time we commented on the internal condition of the market, we referred to Godot, Samuel Becket’s legendary character who the others in Waiting for Godot are waiting for but who, in fact, never arrives. Since that time, which was back on February 14th, we have not posted as we have continued for the market to indicate its intentions. Well, as we wait for the U.S. markets to open today, the internal condition of both the New York Stock Exchange and NASDAQ have already exhibited an important change by coming out of their respective overbought conditions.
For those who are interested in how we measure the overbought/oversold condition, we monitor a ten day moving average of the difference in the number of advancing declining stocks and the corresponding volume of trades.
As of last night, the New York Stock Exchange had left its overbought condition and on higher volume. The number of advancing issues was still slightly above the number of declining issues. NASDAQ has traveled further toward its oversold condition, with more declining issues than advancing and also on higher volume. In addition, the number of NASDAQ stocks reaching a 52 week low is more than the number of stocks reaching a 52 week high.
As with overbought being a sign of strength more than an indication of time to sell, so will an oversold condition reflect weakness rather than a time to buy.
What to do now? Take some chips off the table by selling holdings that are already weak. The market is now in a weaker condition that will accordingly be more affected by global political events on the negative side than before. In other words, the market is now more susceptible to a pullback and needs to prove itself on the upside and with greater volume.
In terms of specific levels to watch, we have already broken the first very short term levels:
S & P 500: 1,323 Dow: 12,180 NASDAQ: 2,795 Russell 2000: 818
indicating we are due for more than a one day correction.
The next levels to pay attention to are:
S & P 500: 1,275 Dow: 11,800 NASDAQ: 2,676 Russell 2000: 771