The stock market gapped opened on the opening today and we saw another surge in the last half hour, as the powers that be wanted to make sure a number of positives occurred entering into the seasonally weak period of the year.
I realize that pending home sales were up and better sales is good news but let’s not be fooled here, the powers that be wanted to achieve certain technical achievements and that was clear with today’s market action and the timing of the surges.
Two important technical achievements were achieved.
First, May now has a higher high than April, which keeps alive the idea that maybe we have a bull market in the works and secondly, the late day surge pushed the Nasdaq Composite to close slightly above its 200-day moving average.
This should do it as many in the public use the 200-day moving average as their key buying signal. The Fed knows exactly how high they have to push the market to bring in the momentum buyers.
This achievement now puts into the minds of investors that a new bull market has started and it also fosters the idea that if the stock market does correct in the next six to eight weeks, we are likely to hold above the March lows, all of which was critically important for the Fed to turn the stock market around and realign bearish sentiment.
The stock market is not worried about the sham bank stress test as it knows the Fed will never reveal the real numbers of the condition of the banks for fear it will up end the apple cart. I think it is interesting they postponed the results of the stress test from today to Thursday of this week, the day before the unemployment figures are released and have scheduled a number of Fed speeches scheduled to release the good news about the banks, clearly trying to deflect inspection of continued poor employment data.
What scares me is that smart money is now quickly exiting this market, using this rally to sell into the euphoria. As we recently discovered, insiders and CEO have sold eight times more stock than they have purchased in the last several weeks. So, obviously, smart money isn’t convinced we have a robust recovery around the corner like the Fed wants us to believe.
Strategist and veteran investing advisor Bill Gross of PIMCO wrote to his investors that, the market's recent hopes over an economic recovery might be overdone.
" Do not be deceived by the euphoric sightings of 'green shoots' and the claims for new bull markets in a multitude of asset classes," Gross wrote in Pimco's May outlook.
Last week I showed you a very important chart that showed that while this is a powerful bear market rally we are not in bull market territory.
Here is another perspective.
In the 30-month bear market of 2000-2002, we saw several powerful bear market rallies, lasting two to three months each. But in each of these advances, the 50-day moving average failed to exceed the 200-day moving average.
On one occasion the S&P 500 managed to close above its 200-day M.A. but the 50-day failed to rise above the 200-day. The stock market stretches only so far, like a rubber band. With the stock market becoming exhausted it contracted and a new down leg developed.
If you study the S&P 500’s 50-day moving average you will see that it is now beginning to curl up but it is deeply discounted to the 200-day moving average. The two averages aren’t close even, suggesting the stock market is apt to exhaust before the 50-day M.A. can trend above the 200-day. In my opinion, this is caution that another retest is looming on the horizon as we enter into the month of May.
Also, notice that in spite of the S&P 500 breaking into positive territory for the year, it still is not above the January highs, nor is it above the 200-day average.
Another issue is the market’s sustainability at this pace relative to very poor fundamentals. Have you notice what the money supply has been doing?
M2 is falling like a rock.
4-10 | 8.6 |
4-17 | 6.5 |
4-24 | 4.2 |
5-01 | 2.4 |
Despite all the positive spin the Fed wants us to believe about the health of the banking system, the money supply is in a tailspin and that can’t be good to support the idea of an expanding economy.
After a two-month run, investors are now becoming more demanding, as well.
" Simply beating reduced earnings expectations is helping in the short term but in the long term, one must have earnings and revenue growth, not merely better-than-expected contraction," said Dan Greenhaus, market strategist at Miller Tabak.
" In light of the broader issues facing the global economy, muted earnings and revenue growth should be expected and with it, muted stock prices cannot be far behind," he said.
No one can counter the fact that while earnings are “better than expected” they are still down 30% and the market is up 30% - a serious divergence that deserves serious consideration. Combined with a plunging money supply I suspect euphoric investors are going to be sorely disappointed going forward.
Presently, the intermediate-term is stretched like I have rarely seen, with the weekly stochastics at %K 98 and %D 92. This suggests the trap is almost set now that the euphoria of an imminent recovery may be close at hand.
Stay clear of the stock market for a bit. If you are tempted to short the stock market, wait until the 14-day RSI levels begin to break below the 50% level. Wait on the outside of the herd and for the direction to change before picking off the extremely extended issues.
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