Bears Starting to Throw In the Towel

Over the past week or so, I have written about some price levels I wanted to see exceeded to turn the picture a little more bullish. Since then, all five major stock market indices have closed above those levels. After that I wrote about the “key” reversal last Friday that had some analysts calling for the end of the bull market. The market immediately rejected that rejection. Then the bears hung their hopes on the “magical” 50 day moving average. On Tuesday, every major index closed firmly above their average price of the last 50 days. The bears cried about the lack of volume. Stock market volume just surged.

I think the bears have started to throw in the towel. And that now makes me a tad nervous.

During Tuesday’s rally, banks closed lower and are reacting negatively to good earnings. High yield (junk) bonds, while rallying nicely, closed near their lows of the day on Tuesday. Stock market participation in the rally is decent, but from resounding and we still do not have a single day where 90% of the volume has been in advancing stocks. That’s not the type of action that leads to a strong and sustainable move higher. It’s what you sometimes see before a rally ends.

I guess what I am trying to say is that after not worrying too much about the short-term for a while, I am now growing more concerned. Before the emails come in, I still believe the bull market is intact and Dow 27,000 remains on tap. I am just not sure that stocks are going straight to new highs from here. Let’s see what the coming few days bring…

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“KEY” Reversal and the 50 Day Moving Average Boogeyman

On Friday, the major stock market indices saw yet another “dramatic” reversal as strong early gains were not only given back but also turned into losses during the afternoon before closing off the lows. People who look at charts usually forecast further weakness ahead with some even using the one day pattern to call for the end of the bull market. I think you have to take these kinds of days in context. One day doesn’t end a bull market or cause a selling stampede. And if/when the reversal day is closed above, it becomes moot anyway.

Besides the reversal day which you can see on the right side of the S&P 500 chart above, you can also see the light blue lines which have defined the range stocks have been in since late January. In other words volatility has gone from extreme to more moderate as the lines continue tighten and will eventually converge over the summer.

Additionally, there seems to be a fascination now with the dark blue line which is the average price of the last 50 days, also known as the 50 day moving average. Pundits are saying that stocks are struggling to regain this line, especially since the line is descending. IF all of the major indices were in the same position, the conclusion may have merit. However, with the S&P 400 and Russell 2000 above their own 50 day averages, I dismiss the conclusion as nonsense. In fact, I wouldn’t be at all surprised if all five major indices closed above their 50 day averages and then we saw another pullback in stocks to trap those people.

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