Market Pros Still Fighting Stock Rally

The rally late Friday helped the S&P 500 close higher for the third week in a row which likely caused further frustration amongst investment pros and hedge funds. Since the start of the year, the information has been accumulating that both individual investors and those who manage millions of dollars were getting more and more negative.

In response to February’s article, “Fund Managers Turn To Cash, Should You? my answer was no. The Bank of America survey results “in my experience suggests that the current decline will be followed by higher stock prices”. I concluded that “The low bullish% readings from the AAII survey and the high cash levels of fund managers in my view are good reasons to look for opportunities to buy not sell.”

It is surprising that after the bullish signals from the advance/decline lines on March 16^th the most recent data suggests that many professionals are selling into the rally as very few have been buying as stocks have moved higher.

In last Friday’s Bloomberg article “Stock Rally That Nobody Saw Coming Is Refusing to Go Quietly” there were many revealing observations. Data from Goldman Sachs revealed that hedge funds had been cutting long positions and covering shorts for “15 of the first 21 trading sessions of March”.

Those who don’t trust the rally and think it is just a “bear market trap” point to their view of deteriorating economic reasons, global tensions and last week’s inversion of the yield curve (point 4). Tuesday’s move in the two-year treasuries above the 10-year rate inverted the yield curve for the first time since 2019, point 3.

In December 2005 the yield curve also inverted, point 1, then moved back above the zero level before plunging much lower in February 2006. It again inverted in June (point 2) and then made its low in November of 2007. The recession officially started in December of 2007 which was two years after the initial inversion of the yield curve. The recession ended in June 2009 several months after the advance/decline lines bottomed.

The current very bearish warnings could eventually turn out to be correct but the point is that it may not be until later this year or even next year. That was the point I was making last week as if this were just a bear market rally like the spring of 2008, it could last well into May (see chart). It is important to remember that bear market rallies typically last long enough so that very few are still bearish.

The Dow Jones Utility Average again lead the markets higher last week as it was up 4% and is showing a solid year-to-date (YTD) gain of 7.8%. Both the Nasdaq 100 Index and iShares Russell 2000 were up 0.7% last week.

The Dow Jones Transportation Average was sharply lower last week losing 5.3% as trucking, railroads, marine transportation and delivery services stocks were all sharply lower. Even though the Dow Jones Industrial Average closed well off the lows on Friday it was still down 0.1% for the week.

My outlook for the stock market is based on decades of research and my own approach to technical analysis of the stock market. When all of the daily advance/decline lines turned positive on Wednesday, March 16 that was the signal I had been discussing since early in the year.

There was more technical improvement last week as the S&P 500 overcame the 61.8% Fibonacci resistance level at $453.49 (point 1). As I commented last week this is typically a key level that once it is overcome signals a higher probability of a new uptrend.

For the third week in a row, the S&P 500 Advance/Decline line has moved further above its WMA. The fact that the daily S&P A/D line overcame the downtrend, line a, was a very positive development. The early February high, line b, was also overcome which is consistent with the end of the market’s decline.

The Invesco QQQ Trust (QQQ) which has a high concentration of technology and biotech stocks was up last week but closed well below the high at $371.83. The QQQ still needs to overcome the 61.8% resistance level, line a, at $373.85. If it is overcome there is strong resistance in the $380-$385 area. There is support now at $345.57 which is the low of the past two weeks.

The weekly Nasdaq 100 Advance/Decline line has closed above its WMA which is a positive sign for the intermediate-term. A move above the downtrend, line b, would be a strong sign that the overall uptrend had resumed. The A/D line had previously reached a strong level of support. A drop below the recent lows would be a sign that the decline from the late 2021 highs was not over.

The analysis of the NYSE and Nasdaq New Highs/New Lows started sending market warnings in November. The decreasing New Highs and the increasing New Lows in late 2021 indicated that the overall stock market was weakening as more stocks were declining than rising.

This analysis has improved as the market has rallied. On the NYSE the number of New Highs has exceeded the number of New Lows for several days. The analysis of the Nasdaq Composite does not yet show similar improvement. I am watching for more than 160 NYSE New Highs to signal a change in trend.

In the next few weeks, it will be important to continue the monitoring of the advance/decline data and my 2018 article will help you better understand market corrections. Since the initial buy signal on March 16^th there have been many stocks and ETFs that have turned positive technically.

The risk on new long positions can be better managed if you look for pullbacks to the rising 20-day exponential moving average (EMA) before buying. In next week’s contribution I will focus on sector and stock analysis.

Source: Forbes