Fake Out: A Rally Built On ‘Hot Air’
By Tyler Durden
Right at the time when markets were making new highs recently I mused whether this rally was based on hot air. I wanted to follow-up on this assessment in light of the recent small pullback and provide an update of some of the technical signals. The bottom line: The technical evidence appears to build on the “hot air” message and suggests that new highs may have been a fake out.
I’ve long outlined my fundamental and structural concerns about financial markets and I won’t rehash them here, but you can read all about them in the Market Analysis section.
One of the most fascinating aspects of market psychology is participants’ tendency to get bullish at new highs while folks like myself, who are voicing concerns, get often dismissed or even outright ridiculed. That’s actually fine by me, after all seeing headlines like the ones below is often the best recipe for a nice contrarian trade set-up:
Why is that so? Because in recent years every major rally, especially those producing new highs, have set up for a sizable trade to the short side. This much is self evident:
And each time new highs were made notable concerns have sprung up that suggested a fading opportunity.
One of the big technical red flags over the past few years has been weak internal participation. Particularly during the May 2015 highs we noted weakening internal structures that ultimately cumulated in the August 2015 down move. The correction in January and February was no exception.
It is true that ever expanding global central bank intervention has continued to bring price back from the brink after each small correction and even now the latest rally has been brought about by promises of tax cuts, stimulus, etc.
But here again we can note an incredible bifurcation that raises red flags. Most notably most of the gains have really come from financials stocks. Indeed 50% of the $DJIA’s recent gain has come from 2 stocks only: $GS and $JPM. Talk about a thin rally.
And if you look at the broader index picture, including the international one, the rally in financials stands out like a sore thumb:
Since those May 2015 highs some of the indices have made marginal new highs, but take out the financial rally and things don’t look all that bright, indeed the global picture, despite record central bank intervention, looks highly unimpressive:
But just a few days ago the Nasdaq made new all time highs so what’s the problem? Well, the problem is that just a few days later the $COMPQ dropped back to July 2015 highs. That’s an effective return of 0% over the course of almost 17 months:
Note also the potential structure of an expanding megaphone that the recent highs have brought about.
The reason this is of particular interest: This summer’s new highs were driven by technology, specifically …read more
Source: Fake Out: A Rally Built On ‘Hot Air’
