Basing pattern in place

SPX remains caught below its 200-day moving average but sits at support at the February lows. RSI is nudging its way higher in a modest positive divergence. Sentiment indicators reached extreme readings (a contrary bullish sign), however, internal damage to the market suggests a need for more time to base rather than an impending bounce in equities.

We track the McClellan Oscillator (NYMO) for signs of market extremes. Normally, we would see a bounce in equities as this indicator rises from an extremely low level. Recently, this indicator hit an extreme low and bounced with little improvement in the equity markets. A similar reaction was seen in Nov 09 when SPX remained range-bound until it broke out in Dec. Put/Call remains at a high extreme (bullish) and likely to trigger a bounce in equities.

Value stocks have recently surpassed growth in relative strength (measured by the Russell 2000 growth and value indices). Small caps have also maintained favor over large caps, although a divergence can be seen as small cap RSI is weakening (and RSI for large caps recently reversed upward from oversold under 30). This could suggest the move into large cap value for safety.

We expect equities to remain choppy and form a longer base before embarking on another leg upward. We expect that any positive macroeconomic or global news will propel the markets higher, and we suspect that negative news may begin to have a more muted effect as equities seek a firm footing.

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