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Beware This ‘Too Good to be True’ Rally

Volume is alarmingly low with only a small number of experienced professionals trading


Yesterday, the major averages continued the snapback from five successive losses with the Dow scoring its best day in almost a month. Stocks opened slightly higher, but buying accelerated as traders reacted to a poor initial jobless claim report and PPI number by assuming that the Federal Reserve would initiate a sort of QE3 program.

A talk by Fed Vice Chairman Janet Yellen the night before contributed to the supposition of more easing as she suggested that keeping the Fed funds rate close to zero through late 2015 would help the unemployment picture.

So despite higher-than-expected jobless claims, the Dow Jones Industrial Average rose 181 points to 12,987, the S&P 500 gained 19 points to 1,386, and the Nasdaq gained 39 points to 3,056. The NYSE traded 756 million shares and the Nasdaq crossed 397 million, as advancers exceeded decliners on the Big Board by 5-to-1 and by 3-to-1 on the Nasdaq.

Yesterday was almost a perfect one for the bulls as the S&P 500 climbed above its 50-day moving average, turning up from the support lines drawn from the July highs at 1,347 to 1,357 (see the April 11 Daily Market Outlook) — a direct result of the euphoria when talk of another round of Fed easing was heard.

Nasdaq Chart
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Trade of the Day Chart Key

The leading index, the Nasdaq, appeared to “put the icing on the cake” by not only holding at its 50-day moving average, but reversing from the support zone at 3,000 to 3,040, causing the stochastic to support a move higher by closing very close to a buy signal.

However, several things are nagging me as I review this “almost too good to be true” technical picture. One is low volume, which hardly ever accompanies a major breakout. The Nasdaq traded only 397 million shares yesterday — just about the volume of the last session before the Christmas holiday when it traded 387 million shares.

And a very strange report from the AAII sentiment survey was issued yesterday, which showed one of the highest jumps in bearish sentiment in a week from 27.8% to 41.56%, while bulls dropped from 38.17% to 28.14%. The AAII report is a contrarian indicator, which would normally be interpreted as “very bullish.” Puzzling!

Conclusion: The market is reacting to the hope that the Fed will continue with its easy money scheme and perhaps even start QE3. But that is not what Chairman Ben Bernanke said when last interviewed by Congress.

Stocks are being traded by a small number of experienced professionals, and that is a warning that the “sheep may be close to being fleeced.” It is time to hold off on new trading and investment positions until the “real market” tells us its direction.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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