There’s a lot to like about the current stock market, and it’s pretty easy to ride the current wave higher. A broad mega-cap index continues to rise, with multiple sectors and industries participating. It’s starting to feel a little too easy. And when we feel that way, sometimes volatility is just around the corner. Forget your own biases, leave your opinion at the door (pick it up when you leave the office for the day), and focus on price. Some have suggested that the Nasdaq 100 (QQQ) has drifted away from the S&P 500 (SPX), pointing out that QQQ has not reached a new all-time high. However, during the pullback period from July to August 5, SPX fell 8.5% and QQQ fell 13.5%. Since these lows, QQQ has slightly outperformed SPX. Obviously, if you drop more than this, it can usually take longer to recover. Prices have lost some momentum in the major indexes as the 10-day rate of change (ROC) has hit two lows since its August 19 peak. As for QQQ, it had not reached the point where the daily momentum was cyclical. Since the momentum low in early August, the overbought region has widened, while the moving average convergence/divergence (MACD) histogram has traced two lower highs. Additionally, QQQ’s latest high is barely above its previous high in late September and could be a truncated fifth wave of a five-wave rally since August 5th. Certain sentiment indicators continue to grow, including the CBOE stock-only five-day index. Put/call ratio. Similarly, the 21st has just started to rise. If these continue, it could be a good sell signal. (Mark Arbetter, CMT)
