The U.S. equity market has been seeing large countertrends higher within the construct of the now bear market, each failing to do more than simply fill prior gap-down from prior days. Each rally that’s attempted to get started begins to fade when any tiny sign of supply via prior short-term price ‘memory’ is reached. This has been the theme for the last month as you can see from the chart below.
Some investors may get excited by the single-day performance, the record-setting Dow moves, and the double-digit advances in stocks that are still bleeding from being cut in half in just a handful of trading days. Unfortunately, these moves are not indicative of trend changes and can be found in history during the ‘meat’ of a bear market, not at the tail-end of down trend. I tweeted on Tuesday that since 1950, when the S&P 500 has rallied 8+% were during 2008, ’87 and earlier this month – none of which were just before or right after a final low in stocks. Going back to 1900 for the Dow and looking at 10+% advances (similar to yesterday’s advance) and again we see they occurred in brief counter-trend bear market rallies.
The specific developments I’d like to see to gain confidence in a final low is in place or nearby. My focus is squarely on the breadth of the market and volatility. I’m not concerned with momentum at this point. Momentum can be a sneaky devil during substantial down turns, the math behind the indicators can give a false confidence when used incorrectly. From a price perspective, this trend in the chart below needs to break. We need to see rallies not fail and price to show strength when approaching potential resistance, not retreat.
