First and foremost, the $SPX chart still has a bearish look to it. This oversold rally has been very strong; there's no doubt about that. But oversold rallies often die out at about the declining 20-day moving average, or maybe just a little above that. This rally has just reached that level.
In just nine trading days, $SPX is down 9.0% and has lost 291 points. That's a lot of distance in a short time. This decline has rolled nearly every intermediate term indicator into a bearish status, if it wasn't there already. It has also caused some massive oversold conditions to appear. But remember, "Oversold does not mean buy," and that is lesson that is harshly taught every time the market sells off like this.
Stocks sold off sharply this week -- the first decline of any note since early last December. This one may have some sticking power, though, as rally attempts failed all week, and then when support was broken on Friday morning, a rout was on.
The superlatives that are being used to describe this market are well-deserved. $SPX has advanced so fast that there really isn't any support, unless you want to declare the low of the "half-day" correction at 2825 a minor support area. The one clearly defined support area is the 2680-2700 area that was formed in late December and from which this January rally was launched.
Stocks continue to advance at a rapid rate. Despite one half day of correction (down 40 points from high to low on Tuesday), $SPX has closed at new all-time highs on three of the last five days. There is now minor support at 2770 -- the low of the half-day correction that took place.
Last week, there was an article in the Wall Street Journal, saying that investors who have been buying protection are going to stop doing so, because of the losses incurred from buying the protection. That line of thinking was thankfully countered in this week’s Striking Price column in Barron’s, where it was pointed out that many large investors want protection as insurance in case something unforeseen occurs. I wrote an article yesterday for Moneyshow, and had this comment on the situation:
The chart of $SPX could not be more bullish. It is in a strong uptrend, well above all of its meaningful trailing moving averages, and continually making new all-time highs. Other indices are in similar shape, as far as making new all-time highs, but $SPX has the strongest chart of them all, going back to the election in November 2016. That's when this monster rally was launched, and it's still in full force.
The post-Thanksgiving seasonally bullish period ended at the close of trading on January 3rd. This period is a combination of three different seasonal patterns, which began at the close of trading on November 22nd (post-Thanksgiving, January effect, and Santa Claus rally). $SPX advanced 116 points, or 4.5% over that time period. One component of our research indicates that it is usually best to be in the small-caps during this period. However, this year the Russell 2000 ($RUT) only advanced 36 points, or 2.4%. IWM advanced by 3.56 points, also 2.4%. So this year it would have been better to be in $SPX all the way along, rather than in the Russell.
The market blasted into the new year with a strong rally that has dominated the first three days of trading. The strength of this move is evident in the fact that on both January 3rd and 4th, $SPX gapped to new all-time highs. We have mentioned several times in the past how impressive this market has been with upside gaps to new highs over the past year. Thus, the $SPX chart remains bullish.
