There is an interesting disconnect developing in the market right now. The major indices have held up relatively well, which makes it easy to look at the market and assume there isn’t much going on. But when I look beyond the indices, I see a market that is becoming much more complicated.
Interest rates have been moving higher, with fewer stocks participating in the market’ s strength, and weakness has been showing up in individual stocks even as the major averages remain fairly resilient. That doesn’t necessarily mean a major decline is coming. Markets rarely give us signals that are that clean. What interests me is the growing difference between what the indices appear to be saying and what is happening among the stocks that make up those indices.
This is also a good example of why I don’t spend much time trying to predict where the market will be a week or a month from now. There are simply too many moving pieces, and a convincing argument can usually be made for either direction. Higher interest rates could eventually weigh more heavily on stocks, or investors could continue shrugging them off. Market breadth could improve, or today’’s weakness could spread. We won’t know until it happens.
This is where ITV becomes useful. The indicator is designed to measure changes in fear by comparing current market action with the highest closing level over the previous 20 trading days. I apply that calculation on a weekly basis and use a moving average to help identify when an increase in fear has reached an extreme and begins to reverse.
That last part is important in the market we have today. Weakness by itself isn’t a buy signal. Neither is a scary headline, a bad day for the S&P 500, or even a jump in volatility. I want to see enough fear enter the market to create the conditions we are looking for and then see evidence that the pressure is beginning to ease. That helps keep us from trying to guess where the bottom might be while prices are still falling.
So, the weakness developing beneath the indices has my attention, but it hasn’t given us a reason to anticipate a signal that isn’t there. If conditions deteriorate further, ITV will tell us whether fear has reached a level at which we need to start looking more seriously for opportunities.
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