Oversold conditions are slowly building

By Lawrence G. McMillan

Extremely heavy selling swamped the market in the early going on Tuesday.  But at about 11:30am, a rally started that lasted most of the rest of the day.  As a result, what might have been an extreme oversold day did not occur.  Whether or not an extreme oversold day is required in order to put in a bottom, is unclear.  But for now, the $SPX lows at 1347 are a support area, with support at 1340 below that.  At least Tuesday’s lows took out the overnight lows from Sunday, so the day and night sessions are back in synch.

Equity-only put-call ratios remain on sell signals.  The total put-call ratio was above 1.00 again, but we are not going to trade it today, for the study that we published in the last Option Strategist newsletter showed that one should not trade the second such day when it occurs two days after the previous one.  That is the case now.  Meanwhile, the 21-day moving average of the Total ratio continues to rise.  It will eventually become a buy signal when it peaks, but that may take some time.

Market breadth was negative, but the afternoon recovery moderated the breadth numbers.  Both breadth oscillators remain on sell signals.  Tuesday was not a “90% down” day of any kind, in terms of either “stocks only” data or NYSE data.

Volatility indices ($VIX and $VXO) spiked higher early in the day, but were little changed by the close. $VIX rose all the way to 21 – the top of its “neutral” range, but closed up only 11 cents, near 19.  At this level, $VIX continues to indicate the stock market will be volatile, but confined to its trading range.

$VIX futures gained fractionally, across the whole spectrum.  Thus they remain in a bullish shape, as the term structure continues to slope steeply upward.

In summary, the market continues to flounder.  Tonight, S&P futures are down another 7 points already, so the selling obviously isn’t over.  Oversold conditions are slowly building, but the market can easily continue while that is going on.  For now, though, as long as support at 1340 holds, we wouldn’t view the market bearishly.

This market commentary was taken from this morning's The Daily Strategist Newsletter.