Anyone reading our blogs over the last week is not surprised that the market is taking a breather. A pullback was overdue and we identified that 1730.00-1740.00 area as a level that would very naturally be tested if the bulls failed to break the market out. So what happened in the last few days? The market corrected lower to the support and is now using the Jobs numbers as short term momentum back toward the highs. Should we be concerned or on high alert? Things supporting bulls:
Things supporting bears:
- The bull trend remains intact
- Bonds are correcting as interest rates rise (short term)
- The S&P500 traded over 200 S&P points above its mean indicating that the market is overextended on the upside.
- The leadership stocks (Tesla, Facebook, financials) have stopped advancing in spite of the index being at its highs.
- Market sentiment is very complacent.
- Breadth indicators have rolled to give sell signals.
So should we be on high alert? In the big picture, yes we should be. On the short-term we have to have a more neutral stance as the market can still squeeze ambitious shorts (artificial buying). Today bonds rapidly declined (interest rates up) on the release of the Jobs numbers. This defuses the immediate risk but does not solve the problem. The best way to describe it is that we are standing at the bottom of a mountain looking at a rather large ridge of snow that if disturbed, could trigger an avalanche that would bury us all. Rocks are being thrown at the ridge, but surprisingly it does not give out. With everyone watching rock after rock being thrown, we start to believe that the rock will not be able to start the avalanche based solely on the evidence that it has not happened yet. That breeds complacency. The saying goes- a boxer does not get knocked out from the punch he expects. So complacently put your guard down, because a robust stock market rally like this can’t end badly, right?