Since we are a little concerned about the short-term plight of stocks, let's begin by showing you one of our best short-term oscillators to measure the action of stocks.
Looking at the right-hand portion of this chart, you can see where the 21-Day Oscillator peaked around early February. The stock market had a little pull-back in the subsequent days, but has rallied nicely since. The McClellan Oscillator that had been above +50 (overbought) came down to -50 (oversold), and we remarked at that time that quite often this presages a short-term rally, and it did.
In most cases, however, when this is also accompanied by a weak reading on our Psychology gauge, the rally starts to show signs of some overall market dysfunction, as defensive issues start to outperform. That has been the case as Materials, Technology and Energy have been very weak, while Utilities and Consumer Staples have held their own. We also note that on most subsequent rallies, even though the market indices might make new highs, the McClellan Oscillator will peak out at a lower high before reestablishing that next oversold penetration.
We always observe the McClellan Oscillator for short-term insight, but never depend on it for signals - since it is too short-term and volatile in nature. If indeed we do get an overall short-term correction (and we still think/hope we will), the orange line (21-Day Oscillator) should come down "at least" to the -50 line.
We expect this bull market's momentum to take a little sabbatical, but even if we are right, we expect that momentum to reemerge later in the year with good earnings to more than support its progress.
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