Leading indicators released this week for France, Australia, Germany and China all came in positive. China manufacturing data underwhelmed. Global economic surprises data has been neutral the last 2 weeks – the downtrend has been arrested but no uptrend has emerged. The Euro continues to decline, but under extremes of overbearishness and oversold readings (elastic stretching). Commodities have been accordingly pressured, but with the exception of oil most remain above last week’s lows, and the same applies for most stock indices. So the question is whether pro-risk will follow oil and the Euro to new lows.
The Nymo positive divergence that I last mentioned 16th May was removed by the subsequent two days deeper selling. That leaves us without the typical divergence that we see at a bottom. However, the extreme reading the Nymo reached suggests an important bottom will be forthcoming in the next few weeks, if this isn’t it.
Capitulative Breadth (Rob Hanna’s CBI) hit on Thursday and Friday of last week. In the chart below for 2011 the lower blue line shows where this happened last year. The first occasion was in March, which produced a kind of V-bounce in stocks. The second was in June, where a more rounded bottom was reqired with some volatility around the basing, and the third was the Sept-Oct much longer, messier bottoming. That Sept-Oct period was a double bottoming, however, and buying the first CBI did lead to a v-bounce, only shorter lived.
Source: Quantifiable Edges
Percentage of stocks above the 50MA shows how extreme oversold we just reached, but again from that kind of level we have previously seen v-bounces or more extended basing, lasting from a couple of weeks to a couple of months.
But there is an overarching message: from such extreme readings in Nymo, % stocks above 50MA and CBI (which hit 11 on Friday), the nominal bottom was close, and buy-side attack was the appropriate strategy.
My models show downward pressure into the end of next week. What happens the last couple of days of this week I therefore consider to be key. If stocks can rally further away from their lows then I would expect Euro and oil to reverse and join them and for a v-bounce low to be happening, with some consolidation only into the end of next week. If pro-risk alternatively falls and takes out last week’s lows then I will be looking to attack on the buy side again once we see the Nymo divergence and that would most likely after the end of next week once positive pressure emerges. My leaning is for Friday’s bottom to hold, but we will see.