BMB has had a fairly busy weekend doing other things, so hasn’t spent much time trolling for interesting stuff to post. But reader Randal was kind enough to point us to a good post on the current market’s near-overbought readings over at Chart Swing Trader. Mac has a few comments as well:
…this is my current thesis about this market and where we are headed. Mr. Market likes to bring as much pain as he can to as many market participants as possible, and usually is successful in doing so. Right now, there are still a ton of people shorting this market, and although bullishness has increased, it is not as extreme as it could be. We are right at or almost at the 200 day moving average on all indexes, and I am sure the bears see this as heavy resistance. If we get over these levels, I thing that many of the up-to-this point stubborn bears may throw in the towel, cover their shorts, and begin to go long, figuring that this market is indeed headed higher. Because of this, I would not be surprised for the market to rally for another week or so. I can’t see us heading that much lower with as much short interest as there is right now.
I still, however, have a hard time believing our economy is now completely over this credit crisis and everything is all of a sudden A-OK. For the most part, this rally has seemed to be driven by retail traders and short covering, and at some point, they have to run out of steam. They can’t carry a market on their own for long periods of time - the institutions do that, and they have been absent for the last month and a half. When the last of these retail traders get pulled in and start buying, I think that’s the point we turn. I don’t know if we’re there quite yet, but I think we are very close to that point.
Because of this, I think the topping process of this bear market rally will still take a week or two to complete itself. In many ways, this rally off of the March lows remind me of the August to October 2007 rally that was the last hurrah of the 2003-2007 bull market - the percentage moves are about the same, and both lacked volume on their moves upward. In October, at the top, distribution days started popping up very quickly. As you can see below, that showed that the market rally was over. Right now, the S&P 500 has four distribution days on its count and the Nasdaq has two.
Right now, I would call myself a very cautious, short-term bull. I will manage the positions I have but am hesitant to jump on new ones at this point. The data above has me expecting an end to this rally in the next week or two, perhaps after we move higher still, getting past the 200 day moving averages and pulling in a few more bears. I want to be prepared for that possibility. I will be watching for distribution days - if they start popping up more often, that will be a sign the party might be over. After writing all of this, I may be completely wrong. That’s the great thing about the stock market - no one knows what it is going to do next. If we just pullback on lower volume, perhaps March really was the bottom and a new bull market is starting. I somehow doubt it though. We’ll start finding out next week.
Indeed we will.