Monday selloff is a warning sign

By Lawrence G. McMillan

(MarketWatch) -- Monday’s sharp selloff proved that the bears do have some life.  But is it enough to actually cause a noticeable stock market correction? The bulls have gotten a little too full of themselves, pushing the market into an overbought condition that is somewhat unusual. Now we will have to see if the bulls have enough firepower to halt the selling onslaught of Monday and to rescue the market once again.

The broad stock market had become overbought in an unusual way — by going sideways over the last couple of weeks. Usually, when the market goes sideways, that allows for overbought conditions to be alleviated. In fact, this particular bull market leg — stretching back to November 2012 — has done just that several times.

But this time, there was some internal buildup of overbought conditions. These included, but weren't limited to: Unusually heavy option volume in speculative stocks, increased momentum in stocks that were already stretched by having risen too far, put-call ratios at extremely low levels, and various volatility measures at extremely low levels, too. We’ll enumerate some of these as we describe the current market conditions...

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