About a week ago, we said that the best thing that could happen to the stock market would be it to take a “breather” before it continued much higher. That, we said, would give it a better chance of rallying further over an extended period of time. Needless to say, this is not what has taken place.......However, about two weeks ago, we also said that if the S&P 500 index could rally above its 3,000 (and its 200 DMA) in a more meaningful way than just the slight “break” it had already seen at that time, it would confirm that another leg higher was in the cards. In other words, when you combine those two comments, we were saying that we thought it would be much more bullish if the stock market saw more meaningful breakout above 3,000 on the S&P...AFTER a short-term pull-back than if it took place immediately.
Well, as we all know, a pull-back did not take place. The further breakout took place immediately, so our best case scenario for the bulls did not playout. This does not mean that a longer-lasting rally cannot take place, it just means that the market is reaching its breakout point under a condition that is more overbought that it would have been under our best case scenario. Thus will make it a bit more difficult to rally towards the February highs in a relatively quick fashion, but it does not preclude such a rally from taking place.
When the S&P was trading below 2,300 back in March, we said that it was a good spot for investors to venture back into the market...and that was ripe for a very sharp bounce. In fact, we said the bounce could retrace as much as 50% of its decline (or even a small amount more) before it topped-out. That call worked out very well...but we readily admit that we did not expect much more of a rally from that 50% retracement level (which was just above 2,800). So although we were looking quite good after the market bounced 27%, we have missed the last 11%. The question right now is whether we should chase it up at these levels.
If the S&P can close above the week above 3,100, we are going to have to become more constructive on the market. A weekly close above 3,100 would lead us to suggest some of the stocks that we have highlighting recently...that are on the cusp of breaking out higher on a technical basis (such as energy stocks like CVX & COP...and bank stocks like BAC & JPM)...while maintaining important positions in stocks of companies with great balance sheets, and strong management teams.
There are still many reasons to be skeptical about this rally, so becoming overly aggressive up at these levels could/should be a dicey proposition. On the technical side of things, as we mentioned above, the RSI charts on all of the major averages are getting overbought on a short-term basis. (First chart below.) Second, the put/call ratio fell to just 0.40...its lowest level since 2014!!! (Second chart below.) Third, the Investors Intelligence data out yesterday morning showed that bullishness has reached 53.5% (it’s highest level since February 19th) and the spread between bulls & bears had reached 29.8...its widest spread since February 26th. Therefore, the bearish sentiment that has been consistently high during much of this rally has evaporated.
However, it’s the fundamental side of things that keeps our skepticism high. We keep hearing and reading about how the lower numbers on the coronavirus...and the re-opening of the economy...are the items that are fueling this most recent advance. We disagree. We believe it’s central bank liquidity...as well as the issues that kept the market rallying in January and the first half of February. That would be FOMO, momentum strategies that are very prevalent in the markets right now...and the algos that run them. We’re sorry, but everybody has known for a long time that the cases of the coronavirus would drop steadily as the weather warmed up...and that the economy would improve dramatically (from a ridiculously low base) once the it started to move out of its lock-down phase. (How many pundits do you know who were saying that there wouldn’t be any pent-up demand???)
Therefore, all of these positive developments were well-known in advance...and so after a more than 30% rally in the stock market, they were already price into the market. To believe that a further rally will be spurred by a return to 2019 growth levels (in terms of GDP growth & earnings growth), one has to believe a return to those levels will come in 2021 or 2022. Since anybody who is being honest with themselves will admit that they don’t have a clue as to whether that can happen or not...or the resurgence will merely take back a certain percentage of the recent weakness, we believe this rally is based much more on the issues we just sighted...and not on any realistic fundamental factors. Nobody knows if we will regain those 2019 levels...or merely reclaim a portion of those growth levels and level off at much lower levels. “Hope” is not a realistic “fundamental factor.”
With all of this in mind...and certain indices like the reaching a critical technical levels (with Nasdaq composite less than 2% of its record highs and the NDX Nasdaq 100 actually testing its all-time highs (third chart below))...we believe investors should remain VERY nimble. Again, if the market can hold-up as we move into next week, investors should move even more towards the lagging stocks/groups that are showing signs of breaking out. However, given the technical condition of the market, it will be essential that they use tight stops on any positions in those names. If the market rolls-over in any meaningful way...and falls back below the 3,000 level (and its 200 DMA)...it could/should force these momentum-based investors to reverse course very, very quickly. (Just like they did in March.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.