The market turned completely schizophrenic last week. S&P 500 index found support at June lows and rallied violently last Wednesday only to give up most of the gains later in the week. Wednesday’s rally was another 90% up day (up volume represented more than 90% of total volume on that day). Those days used to occur once every several years, but now we see them almost every week. Most of internal indicators are extremely oversold, and what is surprising is the fact that S&P is down only 6% from the top (total decline was only 8%). AAII survey showed 58% are bearish on the market. This is the highest reading since February 2003 and October 1990. Both readings occurred just days before long-term bottoms. This shifts probability in favor of bulls on intermediate-term basis. While the short-term picture remains very unclear, there are signs that the market may hold better than the majority anticipates.
NASDAQ remains the biggest laggard due to huge selling in the semiconductor sector. Semis are at the most oversold level I have seen which can be a bullish sign. If this sector manages to stabilize or rally, it could provide the necessary spark for the stock market. It is interesting to note that Utilities are near all time highs and Banks are holding better than the rest of the market. This development is usually positive for both stocks and bonds looking forward longer-term.
SOX (Semiconductor Index) weekly:
RSI reading of 19.21 on the SOX is the lowest reading ever. Buying opportunity? I think so.
Dennis Leontyev
