Date: March 7, 2016

Market Stretched in Short-Term But Intermediate-Term Remains Bright

During strong initiations off a bottom, price just powers higher seemingly day after day without much pause. The most beaten down stocks rally the most and the bears claim it’s all “short covering” and doomed to fail. But it doesn’t. Slowly,one by one, the bears stop disavowing the rally and become silent. Each short-term overbought condition hears some renewed calls for more downside, but typically there’s nothing more than a few day pullback of 1-3%. Since the current rally began on February 11, there have been three such instances and each time, stocks paused for two days. The market is once again at a similar juncture.

On Friday, the government released a good employment report regarding job creation. However, that was tempered by wages falling. A huge gap up would have been a nice place to book some gains. Rather, stocks saw some very mild weakness followed by a small intra-day rally before losing steam into the close. My review of hundreds of stocks and ETFs over the weekend shows a market that’s a little tired. No significant warning signs or indications the rally has ended, just the need for the fourth pause to refresh or mild pullback.

At the same time, treasury bonds should see at least a small bounce. Gold was the most interesting story on Friday as it saw a fairly large scale reversal. That turns the short-term trend neutral. I wouldn’t be surprised to see gold try to rally in the morning today before the bears try again. Until gold closes above Friday’s high, the bulls are no longer in total control.

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Paul Schatz, President, Heritage Capital