Date: March 2, 2016

What do the Bears Say NOW?

Late last week, I wrote in Another 7% in the Cards that stocks were far from done going up. If you missed that post, it’s a good one to go back an peruse. That’s the same message I offered a day after the bottom in February and I have updated the S&P 500’s chart below.

With Tuesday’s huge rally to open the month of March, the S&P 500 has moved meaningfully away from the bullish line in the sand. That does two things. First, it puts the S&P 500 closer to my target and second, it makes that bullish line in the sand all the more important on the way back down.

line in sand5

Speaking of Tuesday’s rally, it was very powerful price-wise. Additionally, we saw very strong breadth numbers which is the net number of stocks advancing and declining on Tuesday. Sector leadership was more than just constructive. High yield (junk) bonds which I forecast would see a major low this year have suddenly surged from their open coffin. Don’t underestimate that driver if this rally is for real! Only volume was a question mark, but long time readers know that I do not consider volume to be a primary indicator. And the data back that up. It was a good day for the bulls across the board.

Once again, stocks have become overbought in the short-term, just like they have twice before since the bottom. Overbought conditions usually bring on some type of pause to fresh or pullback. In bear markets, these conditions lead to an immediate resumption of the downtrend. In bull markets, stocks keep powering ahead.

As I have mentioned many times before, when stocks hit a short-term extreme in either direction, the next few sessions to week are often very telling for the next few weeks or month. If stocks can hold on to their gains or make more headway, it will add more credence to my 7% more forecast. If the bears can take the major indices below that bullish line in the sand, the rally is likely over. As you know, I remain in the bullish camp and believe the resolution will be to the upside.

Not to be lost in the shuffle is the fact that China is no longer the tail wagging the dog. I wrote about this last week when our market shrugged off an enormous sell off in China and rallied. It’s healthy and good that a decoupling is taking place.

On the energy front, while oil has been the primary and overwhelming driving force for many months (No, it’s not the Fed, Iran, China, earnings or economic data), it was also good to see stocks surge higher without needing oil to lead the way. Oil did rally, but stocks did not move tick by tick with oil. One could even argue that stocks pushed oil higher on Monday.

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Paul Schatz, President, Heritage Capital