SHORT TERM: biggest one day gains since Mar/Apr 2003
As reported in last thursday’s post, and tracked on the NAZ weekly chart: Investors Intelligence reported last wednesday the lowest bullish sentiment, (very bullish), since Mar 2003. And today we get the biggest rally since March 2003. Not a coincidence, this is quite bullish! Our stock indices gapped up on the open, rallied nicely until about 11 AM, then pulled back some into 1 PM and awaited the FED’s decision. At 2:15 PM, the FED announced that it had raised short terms rates another 0.25% to 5.25%, as was expected. What was not expected was the response: the biggest rally in three years! At the close the oversold SOX/R2K were up 4%, the NAZ/NDX/TRAN were up 3% and the SPX/DOW were up 2%. Quite an impressive showing!
Posting the hourly chart of the NAZ in the photo section. Notice the gap up from the lows in mid June, that was nearly filled yesterday. Now notice the gap up today, before the FED even made the announcement. This is quite bullish as it appears to look like the third wave of the first impulse wave up from the lows. This is typical action one would expect to see in an unfolding impulse wave: support gaps and acceleration gaps. We’ve been seeing this throughout the bull market. Also, notice the SPX daily chart in the photo section, and how todays action broke through that downside channel that has been in place since the correction began.
The operative EW pivots have contained the market for a couple of weeks: NAZ 2094..2109..2153..2177 and SPX 1226..1240..1254..1268. Today the NAZ gapped up over 2109, (NAZ 2094 is the previous gap), rallied past 2153, and ran into resistance near the upper limit pivot at 2177, closing at 2174. The SPX gapped up, held 1254 during the midday pullback, and then rallied past 1268, closing at 1273. We might need to start ratcheting up the pivots, just like the FED has been racheting up rates. Short term momentum is definitely overbought. We should see some follow through tomorrow morning, and then the bears will try to reassert their influence on the markets. The EW pivots: NAZ 2153 and SPX 1254 should create support, if not SPX 1240 should certainly hold up. I don’t quite have an "all clear signal" on the stock indices yet. But Google is now in an uptrend and should lead the NDX, and the market activity is definitely looking impulsive. Several of us, I know, are already long as we have be buying over the past two weeks. Personally, I will be looking to add to my positions on any decent pullback. Still short Bonds, btw. You may skip the next section if you like. Just some personal observations of why our market has been lagging on the international scene.
Over the past six months I’ve watched this market struggle, while many international indices flourished as they "trended" higher. Our stock indices made new highs at the beginning of the year, only to be sold off into Feb/Mar. Then, after establishing another uptrend into Apr/May, they would barely rise 6%, when all the other uptrends we’ve had were double digit gains. I’ve seen good economic news sold off, as well as bad economic news: a totally irrational behaviour. And today, a rate hike aimed at slowing down the economy to control inflation, ignites the biggest rally in three years. I have a drawn some conclusions from all this.
Investors are generally bullish, as the U.S. economy has grown consistently for over two decades. The last major recession was in the early 1980’s. This bullishness, at times, gets overzealous as it did in 1987, 1990 and the late 1990’s. A bear market followed the 2000 top to correct what Greenspan called; "Excessive exuberance." Conversely, day traders are generally bearish. Day traders reap their biggest rewards from volatility and bear markets. Markets move down twice as fast as they move up, and volatility increases. It appears to me that our futures markets have grown too large, compared to our foreign partners. Highly leveraged futures contracts are being offered on nearly every stock index. Rather than being used as a hedging instrument, as they were originally intended, they have become a day traders paradise. And day traders are now the controlling market factor on a day to day basis. For example, if I were to put enough money to work in the NDX to drive it up 1%. That rise would evaporate as soon I as stopped buying. Day traders would sell into the rally, driving down the value of the futures contracts, and as a result the cash index as well, without any actual cash selling by anyone: sell programs. We used to term it; "The tail wagging the dog" in the early 1980’s, and then they only had the SPX futures contracts. In summary, when the market appears irrational you know who is in control, or out of control, as would be the case today.
Stay with the trend, which continues to remain bullish, as we have been in a bull market for four years. But when a correction finally comes along, that everyone chooses to ignore, and does not call it "THE TOP" as they have been for three years, sell everything: becuase the actual top will probably only be one more intermediate wave advance away.
INTERMEDIATE TERM: looks to have bottomed and reversing upwards
LONG TERM: bullish