7/19
…it’s little surprise for the broad indexes to pause after mounting an impressive rally from the late-June lows. Any market needs to digest gains, lest it overheats and retraces its winnings.
The market’s moderation is about as good as can be expected. Indexes have given back practically no ground, and leading stocks have been well-behaved, if not exactly torrid. The IBD 50 on Tuesday fell less than 0.01%, so technically speaking it outperformed the market. It too is showing little elasticity at recent highs.
After three weeks into the market rally, three take-aways are important to help understand current conditions.
1. There’s been virtually no institutional selling to speak of since the lows. Each index has only one day of higher-volume losses since the June 30 follow-through, which itself was an unusual rally confirmation because it happened just three days into the new rally.
That’s uncommonly light selling by institutional investors, and it indicates these powerful forces are not using the advance to take profits or to make up losses from earlier weak spells in the market. A reasonable conclusion is that institutions generally want to hold shares.
The follow-throughs of February and October 2014 also saw pretty clean distribution in the early weeks. The uptrend that started in February 2014 resulted in an advance of seven months until the market got in serious trouble again. The October signal led to nine months until a market peak, although much of that advance came in the first couple of months.
2. The put-call volume ratio still works as a bottoming signal. The ratio has had an excellent track record flagging lows, and it did it again. The ratio spiked higher June 27, the day the indexes reached bottom. Although it doesn’t take the place of the follow-through, the surges in investor fear captured by this indicator continue to help find bottoms. (The ratio is plotted below the Nasdaq chart on the market trend page. Click on the link provided below this article.)
3. Breakouts abound but are not necessarily producing large gains. Dozens of breakouts have occurred in the past few weeks among leaders. But most of those are still close to buy points, not rallying a whole lot. Part of the problem is that some stocks formed the right side of bases as the market rebounded, and now that indexes are resting it’s been difficult for the breakouts to get much follow-through buying.
Leaders that broke out earlier have been able to extend gains, though. And, notably, sell signals have been relatively sparse among the top-rated stocks.