From the get-go traders pushed stocks higher aided by a positive ISM non-manufacturing report showing a wee bit of growth. Institutions sat mostly on the sidelines as volume was lower than Friday’s trade. However, some leading stocks enjoyed excellent price gains with volume support. Even with leadership showing strength it failed to excite the majority. We did see strength in the precious metals as gold continues to consolidate nicely. It would have been a better sign to see stocks move higher in tandem with volume, but today wasn’t in the cards.
September started badly as stocks fell in heavy trade and began to rebound on light volume. However, volume began to pick up on the upside and produced some nice gains. Early September is when we saw leading stocks take over and today we saw leading stocks outperform. I have mentioned it here before, but it is a very likely scenario funds and institutions are moving towards quality growth stocks and dumping junk-off-the-bottom stocks. This becomes evident as leading stocks relative strength continues to move higher. Another clue is the amount of outflows are hitting equity funds forcing managers to liquidate positions. As shareholders withdraw cash managers are forced to sell causing distribution. More importantly, it is how stocks react after distribution and at this point leading stocks are rebounding quite nicely after bouts of distribution.
VIX was another clue Friday that our downside was limited for the time being. The gap open and subsequent fall signaled the index was more than likely moving lower for the time being. Today the index again is showing that the market may have a bit of upside left. There is something that would negate any upward move and that is if we see a major distribution day where leaders crack and volume swells. Until this occurs it appears this market will move higher for now. Remember, take it stock by stock by picking your spots.
As far as oversold conditions go, they still exist as the McClellan Oscillator is still in oversold territory. These conditions can continue for longer periods, but when the McClellan Oscillator has been quite the indicator as of late. It has signalled a bottom in July and September. Friday the oscillator become more oversold than the September low and was near the low made in July. Although this is a secondary indicator it is nice to see this align with the action within the market and leading stocks.
Let the leading stocks guide us here through this market. If distribution does occur we’ll know it is time for the market to take a rest and correct like so many are predicting. Keep positive and your losses small.
