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The Pitchfork Rally. Here’s What To Watch

Just because we don’t understand recent market action, does that mean it’s wrong to participate?

Stocks continue to be wildly disassociated with what’s happening in the real world these days, and the news just continues to get astoundingly worse: riots, civil unrest, virus fears, economic fallout and trade tensions remain legitimate concerns, yet stocks just keep chugging along.

We’ve all struggled to make sense of the rally lately, like many who rely on factors like earnings guidance, economic data, vaccine hopes, Trump tweets, to understand price action have largely thrown up their hands in despair given the uncertainty. Looking back, many who took down exposure for the right reasons in March have been left to now chase this rally, as prices have skyrocketed much higher than many had expected, outside of the Perma-bull types who failed to de-risk during the meltdown.

The bottom line: those who were wrong during the decline are suddenly right, and vice versa. Very few managed to sell at the peak, hold out for the decline, buy the lows, and hold for a 35% gain. Thus, most professionals are left with massive underperformance and the need to chase gains, while the individual investor who tries to make sense of that around him and invest thoughtfully has been left watching. Furthermore, most who have profited during this rise feel rightfully guilty when so many without money in the market have lost their jobs, or are suffering with failing businesses, or have fallen ill to the virus. One thing’s for certain, utilizing some form of technical analysis these days is essential to making sense of the rally, as a non-emotional take-based on pattern analysis, volume, momentum, breadth, seasonality and sentiment is increasingly important these days. More important than ever.

With that in mind, where does this rally stand in the bigger scheme of things, and why haven’t stocks fallen in the wake of all this bad news?

Heading into this week, it was thought that trends very well could reverse and for many of the right reasons. Yet price just hasn’t given way, and even Tuesday’s early decline attempts ended up ratcheting back to close positive with breadth numbers of about 3/1 bullish. That of course was less than prior day’s totals, and now we’ve seen 10-day averages of the Equity Put/call ratio dip back down to the low 50’s. That’s alarming, and not the best environment for new longs, particularly with NDX right near former highs after such a big move, and defensive trading starting to gain traction.

Demark indicators have just come into alignment on the indices, but as those who make use of these tools rightfully know, they can often be far more accurate on stocks than on the indices themselves. While many were screaming “fire” a week ago, these indicators were not yet aligned. Now we see stocks like Apple (NASDAQ:AAPL) still not lined up and will require another couple days of rally potentially with strong resistance just above 324 up to 327. This certainly could be important, or might not be. We’ll see. The key is to await the pullback from the highs that forms the first five wave (Elliott-wave) decline lower. While the NASDAQ looked to be breaking down Tuesday, the decline was anything but five waves, and by end of day, prices had marched right back to the highs. Thus, a test of February highs still looks more likely than not, but our recent Technology waning might be something that stays with us awhile.

While Industrials snapped back to buoy the market Tuesday, what sector will be next? The lack of meaningful performance out of the second and third largest sectors, being Healthcare and Financials would seem to be a net-negative. The next three days would seem to potentially offer some clues in this regard. The key takeaway is that 35% rallies off the lows might not just “end with a bang” and often take some time to rollover.

This is good news to the end of 2Q/early 3Q Bulls, as it means even on a mild pullback, we’ll still likely get a chance for more rally into July and/or August. It stands to reason that if the rally continues to be not trusted, due to some very relevant reasons, do all those doubters typically sell at the peak and catch the highs? Typically not, particularly when momentum and breadth have been trending higher.

Bottom line, I will still be defensive this week in the short run, but am on the lookout for why this is wrong. It looks right to adopt hedges as the NASDAQ nears highs, but yet it remains tough not to have longs, and if anything, hedges should be kept at a minimum until at least some evidence of weakness occurs. Technology to me still looks to stall out, and this remains 26% of the SPX. Utilities and REITS have gained some good ground, while yields remain range-bound and the US dollar looks to be beginning a larger selloff. This should be good for emerging markets and commodities, and I think it’s right to use pullbacks in the precious metals to still buy dips as higher prices look likely in June. It’s right to utilize stops, but essential to remain involved in this rally while it’s still ongoing, despite being skeptical of “why” stocks are moving higher, and the longevity. Being defensive after a 35% move in two months is prudent, and expect keeping a close eye on sector rotation will continue to be smart for the weeks and months ahead.

Key Points

  1. This remains a bear market bounce, NOT the start of a new bull market
  2. Any stalling out as June gets underway that backtracks likely will NOT reach new lows right away given the extent of our rally.

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