Since it's Wednesday, it's time to review our Early Warning indicator boards, which are designed to suggest when "the table might be set" for the trend to "go the other way" for a while.
Our Review Process: We start each week by identifying the state of the big-picture environment. We then review the current trend and the degree of momentum behind the move. Next, we look at the potential for a countertrend move to develop.
My Current Take...
For the past couple weeks, I've noted that the Early Warning board was a mixed bag that didn't provide either team with much of an edge from a near-term perspective. Although I wouldn't call the current weight of the evidence "table pounding," I do believe the board is edging its way toward the bear camp.
If you look closely at the indicator rating gauges, the point becomes clear. While the indicators are not universally negative, they are certainly within spitting distance of their respective red zones. As such, I would not be surprised to see the bears try to make a run in the coming days. From my seat, this is especially true given that (a) we are now in the heat of earnings season and (b) the megacap COVID leaders (think FANMAG and friends) could certainly use a rest.
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.
Stochastic Review
Over the years, I have found that reviewing the basic stochastics is a solid way to determine when an index or security may be ripe to "go the other way" for a while. I like to keep it simple here by using a 14 day %K (with 1-day smoothing) and a 3 day %D. It's not fancy, but it tends to be an effective tool for an oftentimes complex subject.
S&P 500 - Daily
(Click on image to enlarge)
As I wrote last week, it is clear the stochastics remain in overbought territory. Yet at the same time, I'll continue to argue that we've likely got a "good overbought" condition on our hands.
To review, while a traditional overbought condition tends to lead to countertrend moves down, a "good overbought" condition occurs when a market "gets overbought and stays overbought." Another key to this condition is when the stochastics mean revert, they don't stay oversold for long. This tells us that dip buyers are active and are using any/all pullbacks to acquire equities.
So, what I believe am seeing here is a "rally continuation" sign, which tells me to #BuyTheDips when weakness develops.
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