Well the bulls did it – the S&P 500 has managed to stay above the 50-day moving average for more than three days, a feat not seen since May of last year. And it was accomplished amid extreme overbought conditions and virtually no significant political or economic news.
Oh, we did get the final version of Q4 GDP, which was revised downward to -6.3%, the worst quarterly GDP figure since the 1930’s. Perhaps today the traders felt that the ugliest water is now under the bridge and downstream.
If it were only that simple.
The intervention / manipulation I discussed yesterday created a lot of discussion, both in email to me, telephone calls and among writers at MarketWatch.com – apparently a larger and larger number of people are concerned about the disappearance of a free equities market and recognize the unusual volatility created when too much intervention is applied.
Regardless of how the market has managed to elevate above the 50-day moving average for a fourth consecutive day, there is a psychological effect when this kind of event occurs.
The probabilities for a pull back that takes prices back below the 50-day moving average are still pretty high. But even if that does happen, as I expect it will, a new die has been cast. The March 6th lows are now likely to hold up for a while. And this was probably the motivation behind so much of the recent “intervention” buying, regardless of who was doing it.
Check out the S&P 500 prices versus the 50-day exponential moving average:
Notice the rally that followed the November lows. The S&P 500 slowly zig-zagged up to the 50EMA only to quickly fall back after a couple of days. And even though there were two other attempts in late January and early February, the psychological impact of prices being turned away so quickly allowed another round of selling to take place – and did it ever take place!
I suspect there was a clear realization among the “market makers” and institutional buyers that the November lows may not hold. So most buying was set aside while a further deeper hole was dug, ending in the lows seen on March 6th.
The extreme oversold condition early this month allowed for a new rally to take hold. And a lot of short-covering helped make it happen in spades. It is likely that the interventionist / bulls (for want of a better description) seized the opportunity to make a difference on this latest attempt at the 50-day moving average.
It appears that all the stops were pulled out to keep prices advancing for a sufficient time to affect a psychological difference. It looks like it may have worked.
While I have little confidence that this bear market is over or that prices will continue this steep climb without a decent pull back, there is a very good chance now that the March 6th lows could hold for a good while – even with a strong retracement.
However, this is not the time to become a buyer, i.e, to believe the spin and jump on the train with both feet. The probability of a strong pull back grows greater with each passing day that the market dances above the 50MA.
Technically the market is more overbought than I have seen in a very long time. For example, let’s take a look at the Nasdaq McClellan Oscillator. If you will regularly follow this indicator you will find that when it reaches extreme lows the market has been through a sell-off and a rebound is close in the wings.
Conversely, when this indicator reaches extreme highs the market has experienced a strong rally, often a spike rally straight up (like we have seen the last 2 weeks). When this indicator reaches these extreme heights a pull back is often just around the corner.
Check out today’s Nasdaq McClellan Oscillator:
The Nasdaq McClellan Oscillator has been at extreme highs since the middle of March. Today it reached a level (88.8) that has not been seen since the middle of January, 2001. If you go back and check what happened in January of 2001 you will find that a strong pull back occurred when this indicator climbed over the 80.0 mark.
No indicator is perfect. Were it so, everyone would follow it and everyone would be wealthy investors. But this one has been right so often that I wanted to draw your attention to it lest you be prompted to buy a ticket on the train which some think is now leaving the station.
I know it is hard to trust anyone. I know it may even be hard to trust me. But for those who still have the confidence in our technical tools, please trust me – this is not an opportunity to become a buyer.
A pull back of significant magnitude is more than overdue.
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