Last week, we picked up a story courtesy of Bespoke Investments that showed just 4% of S&P 500 stocks were above their 50-day moving average – a level not even seen during the March 2009 lows!
So we thought a stock market bounce might be on tap – and sure enough, this week we got it.
Now after 3 straight up days, where do we sit? We’re now out of extreme territory – now with 29% of S&P 500 stocks above their 50-day MA. To illustrate the relationship between this ratio, and the actual price of the S&P 500, I plotted both below for the year to date:
Source: StockCharts.com
Of course this is a crude technical indicator, and one based on trailing prices at that. But it has been effective at identifying extremes – especially oversold ones. Not as much during overbought situations (like February to April of this year).
So where to from here? I still see this ship heading down (here’s the big picture of “why”).
But we could rally further from here. We closed today at 1070 on the S&P. A rally up to but not surpassing the June highs around the 1130 mark would keep our bear market signature of lower highs and lower lows intact.
But I don’t think a run up to 1130 is likely. We’ve retraced roughly 50% of the last decline at this point. So we could go farther – but that is not required at this point. We’re already halfway there – this mini-rally is livin’ on a prayer!
Bottom line: Any further price appreciation will certainly leave a bear like me licking his lips for a chance to reinitiate a nice, juicy short position! I’m not short yet…but I plan to be before this mini-rally is through!
And if you’re new to our “shorting the S&P 500″ mini-series, you can get caught up on our trade history – and thought process behind the trades – in the Shorting the S&P 500 section on our blog.
Hat tip to Growth Stock Wire’s Jeff Clark for writing about this indicator this morning in his always excellent trading column.
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