Market Tour Update

This week's oversold rally on weak volume does not significantly change the intermediate-term outlook, despite positive upside gaps and the formation of short-term lower highs. This short-term trend change shaping up in the major indices should not be taken as a resumption of a confirmed uptrend while prices remain floating between the boundaries of a channel. Note the chart below of SPX. It is encouraging for bulls to see that the July lows were not broken (higher low in August), but a breakout above the upper channel boundary (near 1140) would support favoring the bullish camp.

VIX took an 8% hit to the downside on Friday September 3rd.  With this move, the VIX closing price exhibits an extreme gap below its 50-day moving average, a negative indicator. Such a gap was last seen in early August prior to the 70-point decline in SPX. In most instances, when VIX is about 20% higher or lower than its EMA 50, a short-term market turn tends to occur. See the chart below:

On the plus side, improved relative strength in Financials was a refreshing change this week (see chart below), as RSI of Financials vs. SPX crossed above 50, and the price relative looks about ready to break above its downtrend line.

Staples price relative to Discretionaries also took a hit this week as the "risk-on" trade resurfaced. Small Caps have also taken the lead vs. Large Caps (the opposite of last week), while Growth takes a stronger bid vs. Value.

Equity markets seem to be shifting their character with each passing week (one week bearish, the next week bullish). The weight of the evidence suggests caution as internal breadth and sentiment indicators remain bearish (edging toward neutral) and the intermediate-term trend remains flat. The short-term swing in the trading channel may result in SPX touching the 1120-1130 area, before seasonal weakness and heightened volatility mark the transition from September into October.

Click here for the updated Market Tour on Stockcharts.com.