The bulls made quite a comeback last week and we saw some major sector rotation. Looking at the 5-day % gains we have:
| Financials |
+10.65% |
| Consumer Discretionary |
+7.17% |
| Industrials |
+3.66% |
| Health Care |
+2.86% |
| Technology |
+2.61% |
| Materials |
+0.46% |
| Consumer Staples |
-0.37% |
| Utilities |
-4.77% |
| Energy |
-5.99% |
Pretty much everything was up save for Energy, Utilities, and Consumer Staples. It's no surprise that the Energy sector was down as the underlying commodities have been selling off hard on reduced demand. And the other two sectors that saw losses last week were both "defensive" sectors that tend to lag during these types of oversold rallies.
So is it time to break out the bubbly? Good times are here again? Everything that was wrong with the economy is now righted? Fannie and Freddie to the rescue? Right?
Not likely.
Despite the monster reversal from the S&P 500 ~1,225 support zone things aren't much different than they were ten days ago when it appeared we were spiraling down into the abyss. Inflation is running hot, people aren't buying houses, this morning gasoline was still over four bucks at the filling station across the street, and, despite what the perma-bulls say, this little relief rally is almost certainly not the bottom of this bear market.
Don't kid yourself. If last Tuesday was the bottom then this bear will go down as one of the shortest and mildest bears ever. With the severity of the problems this economy is facing I seriously doubt that we've seen the end. This is simply an oversold rally -- same as what happened back in March. But, the fact that this probably isn't the bottom doesn't mean we can't make some money from this bounce.
Bullish Points:
- The bulls followed through and didn't give back all the gains the day after the inflection point on Tuesday.
- We broke resistance from the March low -- not by much but we're above it.
- The volume during this rally was monstrous. Unless some huge fundamental event occurs we're likely to see a bounce at least as good as last March.
- Stochastics(5) has become unstuck and may be useful for entry/exit timing once again. Yay!
- RSI(14) made a higher high, the first one since April.
Bearish Points:
- I think we burned a lot of our "bullish" fuel breaking the momentum of that downward plunge. There may not be much cash left on the sidelines to keep this sucker climbing.
- Stochastics(5) is now at overbought levels.
- Volume has been declining.
- There's a downtrend line consisting of four inflection points just overhead that's about to intersect with S&P 500 1,260 resistance. This should occur around Tuesday or Wednesday of this week. Chances are we'll get an inflection point there.
- We're rallying on the back of lower crude oil, a commodity that's dropping in price because the economy stinks so bad people have stopped buying it. That doesn't seem like a relationship you can build a healthy, long-term rally on.
- This market is on a 10-day trough-to-trough time cycle. Friday was the 3rd day. We should see a pullback.
From here I think the S&P 500 will continue rallying to the 1,390 1,290 38.2% fibonacci retracement point I talked about last week. However, I think we'll have at least one pullback before we get there. How that pullback plays out will tell us a lot about the health of this rally. If it's on light volume and mostly concentrated in the Financials and Consumer Discretionary sectors then I'll feel a lot better and look to buy the dip. If it's on heavy volume with broad-based selling across all sectors then I'll look for a retest of last Monday's lows. The 1,275 resistance from last March is directly overhead so that's where I expect a pullback to start (if it happens).
For now I'm staying in my long positions but tightening up stops. I'm not looking to get short unless we break the July low.
