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HarryAloof
10-11-2014,
The S&P 500 Index has fallen a bit more than 4% from its all-time highs established last month at 2,019, while the Russell 2000 Index has retreated nearly 8% over the same period. That is a relatively sharp pullback when compared to what we have become used to in recent years, but the magnitude of the correction has been less painful than the breadth of stocks that have participated in it. The majority of US stocks are now on a near-term sell signal, beneath their 50-day moving average and also beneath their 30-week moving average; which is to say most stocks have caused some pain over the past month. The short-term indicators have now been pushed into oversold territory and we begin to watch closely for signs that the market exhale has subsided. Often the first indication of a substantive short-term bottom in the market is an inability for supply to force the weakest of issues to yet lower prices. These names need not become the leadership of a resurgent market, but should they at least become resistant to new lows we often see the broader market find the means to attract new demand and thus traction toward higher prices.

Over the past week we have seen the NYSE High-Low Index [NYSEHILO] move toward historically low levels. For the first time in 3 years this risk barometer has moved below 20% and is now nearing the washed-out 10% level that has not been seen since October 2011. A move into this territory is not an indication, in and of itself, that a short-term low has been established, but it is the area at which oversold opportunities have developed historically. A move to this area can only occur with stocks finding new 52-week lows rather easily, and in rather substantial numbers, which is what the US Small Cap investment category has provided in recent weeks. Reversals into X's from this indicator within this territory would offer the first bullish signal for the market on a near-term basis. The longer-term health of the US equity market remains in tact on many fronts, but that health has been sustained much more so from the US Large Cap core market, while demand for Small Caps have abated. A near-term bottom would likely come with the selling pressure toward US Small Caps being relieved, and the first such indication of that generally comes with the number of new 52-week lows drying up across the Small Cap market. The NYSE High Low Index [NYSEHILO] offers a lens through which to see such activity when it occurs, and so a reversal into X's from this indicator at these levels would become something of note for the risk environment within US equities overall, and is often the first such signal when a bottom takes place.

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