Despite The Rally, Market Risk Remains

Bull Rallies And Market Tops

We discussed the fulfillment of our expectations for a bull rally. While the rally was attributed to the rather “dovish” stance taken by and commentary from the White House on potential progress on resolving the “trade war” with China. The reality is it had little to do with those headlines but was simply a reversal of the previous “exhaustion extreme” of sellers during November and December.

The rally, as we laid out two weeks ago, continues to work within the expected range back to 2650-2700.

SPX Daily Chart

Importantly, the previous deep “oversold” condition which was supportive of the rally following Christmas Eve has now been fully reversed back into extreme “overbought” territory. While this doesn’t mean the current rally will immediately reverse, it does suggest that upside from current levels is likely limited.

Nonetheless, the rally from the December lows has been impressive. However, I want to caution investors from extrapolating a deeply oversold bounce into something more than it is.

Beware The Headlines

The stock market just got off to its best start in 13 years. The 7-session start to the year is the best for the , and Nasdaq since 2006. (Mark DeCambre via MarketWatch)

While headlines like this will certainly get “clicks” and “likes,” it is important to keep things in perspective. Despite the rally over the last several sessions, the markets are still roughly 3% lower than where we started 2018, much less the 11% from previous all-time highs

Importantly, there has been a tremendous amount of “technical damage” done to the market in recent months which will take some time to repair. Important trend lines have been broken, major sell-signals are in place, and major moving averages have crossed each other signaling downward pressure

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