Is the bull market back on track? After three straight bullish weeks — with the most recent one logging a 2.7% gain for the S&P 500 — the pessimists have to at least acknowledge the possibility.
On the other hand, last week’s outsized gain from most of the indices left the market a bit overextended and ripe for a pullback. Indeed, Friday’s bars for most of the major market indices suggested stocks were already pivoting out of an uptrend and back into a downtrend; the pivot certainly materialized at the right place.
The bulls need not worry about any pullback just yet, however. Although the rally needs a break, it doesn’t necessarily need a long one … and there are plenty of support levels ready to bring a quick end to any selling effort.
Besides, the market’s current leadership suggests there’s a “risk on” mindset in play right now. That tends to take shape when the bigger undertow has turned positive.
The S&P 500 Deserves a Brief Breather
In retrospect, the big three-week rally from the S&P 500 can’t come as complete surprise. We knew in late January the 1,812 area had the potential to be a major floor for the S&P 500. After all, that’s where it hit bottom with a couple of key rebounds from 2014, and where it hit a low in mid-January. It was the ideal spot for the bulls to stage another turnaround effort.
Click to Enlarge Sure enough, they did, with the S&P 500 just kissing that line on Feb. 11, sparking what’s become a (mostly uninterrupted) 9.3% advance.
But how far is too far? There’s no absolute answer, but any unfettered 9% gain pushes the limits of how long would-be profit-takers will keep their powder dry before the unrealized gains become too juicy to pass up.
Even without the 9% advance inspiring at least some profit-taking now, though, the S&P 500 was already reaching a major potential turnaround point … points, actually.
The daily chart above plotted of one of them — the 100-day moving average line (gray) at 2,000. The other reason Friday’s high of 2,009 and a close of right around 2,000 was relatively predictable: That’s right where a key Fibonacci retracement line presently lies for the S&P 500.
The clock, so to speak, starts with the most recent major high of around 2,115 from early November, and uses the recent low near 1,812 as the bottom portion of the span. The index managed to blow past the 38.2% retracement level at 1,928 with relative ease, but the 61.8% retracement line at 1,999 has proven to be a ceiling … just as one would expect.
Click to Enlarge Just because the market is poised for a pullback following Friday’s dojis-shaped bar, however, doesn’t necessarily mean the market is poised for a major crash.
Do you see anything curious about the two charts? The 38.2% Fibonacci retracement line at 1,927 is also the midpoint of the 20-day moving average line (blue) and the 50-day moving average line (purple), and approximately where the 20-day and 50-day moving average lines are going to intersect. Point being, you could expect to see a lot of natural support levels for the market materialize right there, offering assistance to one another.
Any pullback is apt to be short-lived with that support in place. And, considering the shape of another key chart, it’s not a stretch to maintain such a bullish outlook despite the brewing pullback.
Russell 2000 Starts to Lead Again
As impressive as the S&P 500’s gain since the Feb. 11 pivot has been, the advance from the Russell 2000 has been even better… 13.4%.
While the Russell 2000 looks like it’s going to suffer the same near-term fate the other indices are right now (getting pushed lower from the weight of all their recent gains), the fact that small caps are leading the way is a big deal in that it signals a more aggressive, bullish mindset from the market; small caps simply present more risk than large caps do. This is the first time in a long time we’ve seen any real leadership from this segment of the market.
Click to Enlarge One could argue that the recent strength from small caps is simply the result of a much deeper pullback from the group between late November and mid-February. The fact of the matter is, however, small caps have been lagging since the middle of last year. This relative strength truly is something we’ve not seen since early 2015.
Bottom line? The market may not have ended last week on a particularly high note. However, the red flags are nothing more than a reminder that the market moves through a natural ebb and flow cycle … even on the way up.
Until the S&P 500 actually breaks below 1,927, we should give stocks the benefit of the doubt rather than assume the past three bullish weeks were erroneous ones.
On the flipside, we can’t afford to dig in too deep until the S&P 500 hurdles its 200-day moving average line (green) at 2,023. Patience is crucial here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
