There still seems to be no stopping this rally. Every attempt at a pullback is met with more buying. It is amazing to watch the intra-day action to see how every move lower seems to be a struggle, with the up impulses appearing effortless. A healthy trend usually is characterized by a frequent reversion to the mean. When a market fails to correct and digest impulses it is probably being driven more by momentum traders piling on the bandwagon. In other words, the trend perpetuates for the sake of the trend rather than underlying fundamentals. Of course the news media is quick to point out how the recession is a thing of the past and all is well going forward. The market is never wrong. Or so they say.
The chart above is of the S&P etf. The uptrend starting with the reversal bar on February 5th has been a steady march higher through March, with only very few down candles. The adaptive CCI indicator under the price candles shows a persistent reading over the plus 100 line, which is bullish and shows trendiness of the trend. It is rare that the adaptive CCI stays this long over either the plus or minus 100 line. It is usually prudent to not fight the trend when that indicator is beyond either of those lines, even when it seems a bit extended as it does now. A more normal pattern on that indicator looks more like on the left of the chart. The middle indicator is one version of the Chaikin money flow. It incorporates volume in its calculation, and you can see it is weakening a bit. This is not enough to turn bearish. It is just an indicator indicating something, but is not a forecast or signal on its own. The bottom indicator is share volume on the S&P etf, which clearly shows increasing volume on the downtrends, and generally declining volume on the uptrends. Bulls will argue that the public is not yet in this market so volume remains low. Bears would argue that this is a divergence. These divergences can go on for a long time.
One argument I’m hearing is that the market is shrugging off bad news while it continues higher. The health care bill passing has been recently offered as an argument that something very bad for business and the economy failed to produce any down movement in the market, therefore the market is bullish. This is a rule offered in many textbooks on trading. I find fault with this. It is true that in an extended trend there is validity to the concept that if a market fails to respond to news that should further the trend, that trend might be ending. For example, a stock that has been declining for many months on declining earning has an increasingly dismal earning report, and then the stock price fails to continue lower and instead has a large move higher, a reversal to an uptrend might be indicated. In that case the stock has over discounted the worse possible news. But with many months into an uninterrupted uptrend I’m not sure that theory works. On the contrary, as a contrarian I would view any positive news that fails to move the market yet higher to be a sign of a possible top. So far that has not happened, but I am keeping an eye open to the possibility.
It will be interesting to see how the market reacts to the employment report released yesterday. The index futures market was open for a short time during and after the release of the report and they moved somewhat higher. Most of the news media is reporting the report positively, despite the fact that the unemployment rate did not improve, the U-6 actually inched higher, much of the newly employed were temporary census workers, and hourly pay declined. That probably means nothing to this market. If viewed positively or negatively the market seems on an unending move to the moon. Some traders act as if this uptrend is something new. Many markets that get overextended exhibit similar characteristics. But they usually occur when that market is making new highs or lows. Gold recently had a similar move, as did the dollar on the downside. Stock indexes have had several similar moves over the years. What seems different is that this move is only retracing a portion of the previous down impulse rather than probing into new high ground. It seems like the move will never end. Momentum traders keep piling on the bandwagon no matter how crowded it gets, despite relatively low volume. These urgent, almost panic type moves seem to occur more on the downside than the upside, at least in equity indexes. If this trend would just pause long enough to catch its breath and digest some of the gains the trend would appear healthier. The way this is proceeding the resolution could be to the downside with a larger move than a market that allows itself to breath in and out.
One thing I think this market is missing is the threat from Obama. Obamacare passed without so much as a hiccup from the market. The cost to business will be huge. There are already businesses that have announce huge write-downs, and they are being questioned by the government for making those announcements. Isn’t that what they would do under someone like Castro or Chavez? Taxes will rise for everyone. The market doesn’t seem to care. The government will take over a huge chunk of the economy and eventually force private insurers out of business. The market is looking the other way. I believe the next step in Obama’s plan is to attack Wall Street, much more than he has done already. Obama knows that he will be rendered impotent if the republicans take over congress in the elections later this year. He knows that his healthcare takeover is not popular and as things stand now his party stands a good chance of losing both the house and the senate. He must divert attention from the health care mugging and the shady tactics used by the progressive democrats in congress. The news media has already vilified Wall Street. It doesn’t matter that the public should be mad at the government influence over Fannie Mae and the like, as well as strong suggestions to banks that they lend to those they shouldn’t lend to. Reality doesn’t matter. The public is like a school of fish that can simultaneously change direction in an instant. Obama is a gifted speaker. He is smart and shrewd. He can create anger against Wall Street and the anger against Obamacare will be seen receding in the rear view mirror, just in time for the mid-term elections.
Another fear is that the teaparty movement could split the republican vote. If candidates split from the republican party to run on a teaparty ticket, that would greatly help the democrats, obviously. If the progressive democrats can hold congress through the balance of Obama’s term, they will most likely be able to pass immigration reform, therefore allowing millions of new voters to vote, and they will of course vote for democrats. If that should happen the republican party may as well call it a day and go home. They will never be able to win another election. This country will move so far to the left it will become even more unrecognizable than it is today. We may as well just become good buddies with Castro and Chavez. Freedom and free markets will become a distant memory. The coming mid-term election may well be one of the most important elections in this country’s history.
This is one time that I truly hope I am wrong in my forecast. This country is at an important crossroads. If we take the left fork in the road we will go down a path of no return. I don’t think the stock market understands the bigger picture yet. It will.
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