Are We There Yet?

Not quite there but getting close. A look at Dave Fry’s  daily charts gives a pretty good picture. The S&P 500 is just under the January high. His comment: either a double top (bearish) or inverse head and shoulders (bullish) pattern has formed. Let’s weigh the supporting evidence.

First, the bull case: This advance has been led by the NASDAQ and small caps. That is usually a sign of strength. The transportation index ETF is breaking out to a new 52 week high and commodities are bouncing around in a rising price channel, both signals of increasing demand in the economy. Corporate earnings have continued to be solid for the most part.

Next the bear case: Technical indicators point to a near term correction. Volume on the advance has been weak, signaling lack of conviction. The NYSE McClellan Oscillator, Summation Index, and Volatility Index read overbought and overly complacent conditions. Developed foreign markets are lagging – Europe in particular continues to be turbulent. The real estate markets still show few signs of recovery.

Historically, the month of March has brought significant changes of direction to the stock market, most recently last year when nearly all risk assets took off from extremely oversold conditions. Also notable was 1932, which brought a sharp down move, and lest we forget, the end of the tech stock bubble in 2000. This is a good time to be extra vigilant and position for the next major directional move in the markets. Which way should become clearer in the next few days.

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