Did the intermediate top in stocks occur earlier this week? We won’t know for sure for many months, but it certainly COULD have been.
The rally has been running on fumes for month, yet still moving upwards despite the naysayers (such as myself), as the S&P pushed above the 1100 mark (raise your hand if you expected that when the S&P was bottoming at 667!)
Nevertheless, all good things must come to an end eventually – and while this rally has been an impressive one, it’s magnitude has occurred completely within the normal confines of a bear market rally.
A couple of weeks back, we compared the 2009 rally with the 1930 stock market rally, and found a lot of similarities. Of course you can find similarities in anything if you look hard enough, but my point was that whether or not this rally was for real was still “to be determined”, as thus far it’s done exactly what it was supposed to – make everyone think that it was OK to get back in the waters.
Remember earlier this year when stocks were again “risky”? Not anymore! Every drop is once again a buying opportunity. Which is exactly when things get the most dangerous.
For fellow “armchair stock market technicians”, The Daily Reckoning’s Eric Fry cited “a very serious negative divergence” pointed out by options expert Jay Shartsis:
“The new Dow highs have not been confirmed by the widely-based Value Line (over 2300 stocks),” Shartsis points out, “and divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead.
“Traders should also note that a head-and-shoulders top is building on the Value Line Index,” Shartsis continues, “with the right shoulder top lower than that of the left – an extra bearish element. At the current 2,138, the Value Line is about 4% from a new high and it doesn’t look like it is headed back to that level any time soon.”
Source: The Daily Reckoning, a FREE daily e-letter, offers a “uniquely refreshing” perspective on the global economy, investing, and today’s markets.
What’s the script when stocks turn down? The market gave us a sneak preview last year – it’s everything else down too, dollar up!
Now may be an interesting time to pick up some cheap put options on the S&P, especially some of the “black swan” variety, in case this downturn has some umph behind it!
Ed. Note: On Sunday we reviewed Financial Reckoning Day Fallout, the latest book by the authors of The Daily Reckoning.