From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
You’re probably sick of hearing this but it’s important! Even with the recent bout of volatility, new lows have been non-existent across most of the major averages in the US.
To be fair, many of our Intermarket relationships are still flashing red, suggesting continued headwinds for risk assets.
Earlier this week we saw significant selling pressure in equity markets both domestically and abroad. Conditions are as ripe as they’ve been in more than a year for the bears.
So, did we finally get that “fall day,” as our fellow Technician and friend Mike Hurley likes to call it?
The simple answer is no...
To us, the recent readings from our breadth indicators are no different from similar pullbacks over the past 18 months and not what a significant market top would look like.
But we always need to remember that like anything else, analyzing internals is a process.
With this in mind, let’s check in on the 21-day lows for all S&P market cap sizes:
As you can see, the recent flare up in new lows is nothing out of the ordinary. These readings look a lot like the ones from the second half of last year, as well as the spikes we saw just last month. In other words, there is nothing here suggesting any significant downside expansion.
If anything, this is most likely a buyable low... just like the occurrences in June of this year and September/October of last year. These moves only resulted in short-term pullbacks before we saw a resumption of the underlying uptrend.
Is it going to be different this time?
Well, the message from the market in recent sessions would suggest not as the major averages are right back at fresh all-time highs as we look to close out the week in positive territory despite Monday’s selloff.
And to be fair, we did see some weakness roll into our new 63-day low indicators earlier in the week:
This has been the most substantial downside expansion we have seen in over 18 months...
But it’s just not enough to raise any real red flags. Until we see a more severe deterioration in internals there’s no reason to start trying to pick a market top.
Making matters worse for bears is that these lows from earlier in the week have already disappeared.
Another way to analyze internals during periods of weakness is to look at the number of components hitting oversold conditions. We measure this by the daily RSI-14 dropping below 30.
This indicator shows that barely any stocks we’re able to hit oversold during the recent bout of selling pressure… Buyers are still aggressive and continue to step in to defend the primary uptrend that’s been in place for about 18-months now.
One way to confirm this bullish strength we have just seen is by looking at the NYSE Advancing Volume which was greater than 80% for 2 consecutive days this week.
This type of buying volume was last seen in November of last year:
Lowry Research did a study into 90% upside days and found that back-to-back 80% days are very similar to a 90% up day. The study also found this type of short-term thrust is typically a bullish signal for the broader market and suggests higher prices over the coming 12-month period
If you want to read more, you can find the study here
As always, we'll be keeping a close eye on internals moving forward to gauge the market's overall health. We will be right here talking about it as soon as anything important changes.
But for now, markets appear poised to keep grinding higher during this period of summer doldrums, and with no evidence of a “fall day” just yet, there’s no reason for us to get cute and try and call a top here.
