An Oversold Dilemma for the Stock Market – The Market Breadth

Stock Market Commentary

It was an unfavorable day in the stock market, as I anticipated in “Small Cap Stocks Uncork Oversold Conditions.” The following post is a summarized transcript of a “show and tell” video I posted to talk through the accumulating extremes in this oversold market. I used ChatGPT to help with the clean-up.

Oversold Extremes

My favorite technical indicator, the percentage of stocks trading above their 50-day moving averages (DMAs), AT50 (which stands for “Above the 50”) reached an oversold state at the start of this month and is now at 15.5% for a second straight oversold day. This level of oversold has not happened since the notorious lows of October from the preceding year. This milestone indicates that we are currently in a rather extreme territory.

A closer look at other indicators suggests a potential dilemma. While certain indicators are evidently oversold, it is possible that not all bearish events have unfolded yet.

The VIX, which measures market volatility, is behaving as I would like for an oversold extreme. It recently set a new six-month high, which is a positive signal for the potential of a market reversal. Higher VIX levels can indicate more extreme market conditions, which are often followed by rebounds.

Considering the major indices, the S&P 500 (SPY) shows that its current levels are approximately where I marked the onset of what I called the “summer of loving stocks.” The index has nearly erased all its gains from the summer, marked by a significant breakout that lasted roughly two months, peaking in July with a brief rally in late August.

Similarly, small-cap stocks are nearing extreme levels, aligning with the year’s lows, which also matches the pre-pandemic highs for small caps.

However, the NASDAQ remains relatively high. Even though it has slipped below its pre-Jackson Hole high from the previous year, there is potential for the tech laden index to reenter a bear market, which is defined as a 20% drop from the all-time high.

Oversold Dilemma: NVIDIA

My current concern centers on Nvidia (NVDA), which had been on an uptrend until recently, only to confront the 50DMA resistance. If this resistance holds, NVDA might suffer (at least) a few more days of selling. During such a sell-off, the broader market might struggle to remain buoyant if NVDA’s resistance persists. The prospect of NVDA starting an extended sell-off is the dilemma for this oversold period.

Swingtradebot Analysis

On Swingtradebot, I analyzed various stocks to find out how many maintained their 50DMA support. Of those reviewed, Zscaler (ZS) Inc and Intel Corporation (INTC) appeared as potential buys, while I am hesitant about the Fluor (FLR) Corporation, an infrastructure company.

Macro Indicators

On the macroeconomic front, the upcoming jobs report on Friday could significantly impact market dynamics. Additionally, currency markets are currently volatile, with the US dollar showing notable strength against the Canadian dollar and the Euro (USD/CAD and EUR/USD).

Lastly, iShares 20+ Year Treasury Bond ETF (TLT) displayed a surge in volume, marking its highest volume ever according to CNBC’s Fast Money. A decline in TLT indicates falling bond prices, leading to an increase in yields. Elevated yields have been detrimental to stocks and the general market sentiment.

Conclusion

While the current market conditions appear challenging, several indicators suggest we are nearing extreme levels that historically precede market rebounds. See the video below for specific visuals.

Full disclosure: long SPY call spread and calls, long VXX put option, short USD/CAD

Be careful out there!