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Thursday, May 14, 2020

Top heavy rally 5/14

The rally off the March low as been top heavy as we know.  Here are an interesting chart and some words from SentimenTrader.

Some combination of FAANG or FAAMG (Facebook, Amazon, Apple, Netflix - or Microsoft - and Google) has been handily beating most other stocks. And that matters, because those stocks are huge, and they're driving a big portion of the gains.
In the 35 days since the March 23 bottom, the top 5 drivers within the S&P 500 have accounted for 138 points out of the total 565 that the S&P has gained. So, only 5 stocks have accounted for more than 24% of the total point gain.
We looked at every 35-day rally off of a 52-week low over the past 30 years and compared those that were the most top-heavy versus those that were more evenly spread, meaning the top 5 stocks made up less than 20% of the S&P's gains.
There was a very stark difference between the two, with top-heavy rallies not faring well.

Here is a look at the tick signals on this rally so far.

I count 6 tick accumulation signals and 2 almost.  There are 8 tick distribution signals.  Here is a look at what happened coming off the Dec. 2018 low.

Between the Dec. low and early Feb. there were 8 accumulation (1 almost) signals and 1 distribution (3 almost) signal. There was very little selling by money managers in the early stages of that rally compared to the current rally.

The futures got really oversold short term this morning as they hit the 100 SMA.  That combined with news the president would consider more fiscal legislation brought out the buyers.

I just set up this new look at market internals.  The red lines mark overbought and the green lines mark oversold.  Obviously the market was extremely oversold for a prolonged period of time.  That is very unusual.  The short and mid term charts were showing sizable negative divergences at the last peak as the market was thinning out.  The long term line has dropped below its moving average for the first time on this rally.  It spends most of its time above 50 in a bull market.  Obviously there are a lot of broken stocks after that big crash.

Listening to money managers talk is interesting.  There is a camp that thinks the fiscal stimulus and FED liquidity is more important than economic fundamentals for the market.  Another camp believes the fundamentals are so bad they could override the liquidity factor and push the market down longer term.  Looking at the tick signals makes me believe the fundamental crowd has the stronger opinion.  Without some really good news out of the medical community regarding a solution to the virus in the near term a retest of the low is still possible.

We could stay in a trading range for some time while investors gauge how the reopening of the economy goes.  Economic activity is certain to pick up in the months ahead, but how much?  That is the question on investor's minds.  I am not going to pretend I know the answer.  This is the most uncertain situation the market has ever had to deal with.  Back in 1918 during the last major pandemic there were few people in the stock market.  We have a much different situation today.  Conviction about where the market is going might be the one thing we should not have at the moment.

The big question is whether this rally has more to go.  The way the dip buyers have stepped in over the last few weeks it is hard to say it is all over just yet. SPX is still above the 50 DMA which could hold as support if the pullback continues.  A move up to test the 200 DMA is still a possibility.  I need more evidence to conclude the rally is over.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.