While I’ll be the first to jump for joy after yesterday’s awesome 2.95% rise in the S&P 500 — I feel obligated to point out the fact that big rallies of 3% or more are rare. And they normally happen in the midst of bear markets. One caveat: Since the SEC got rid of the short-selling uptick rule in 2007, overall volatility has increased. So we’ve seen a bunch of 3%+ since then — 32 to be exact. Most of these came during the bear market rallies of the spring and fall of 2008. The rest were clustered around the initial rebound from the March 2009 low.
Using market data going back to 1990 through 2007, there were 33 occurrences of a 3%+ rally in the S&P 500. The majority of these occurred during the dot-com bear market of 2000-2002. But a handful marked the initiation of fresh uptrends after big corrections. Examples include the fall of 1997 and 1998 which were marked by foreign exchange troubles in Asia and a debt crisis in Russia.
The overall takeaway here is that today’s swoopy price action could very well be more indicative of short covering rather than genuine new buying interest. One sign of potential trouble: Total NYSE volume dropped 21% today. Breakout moves that aren’t confirmed by higher volume can be dubious.
Still, there is a lot of good news to be had. Breadth was impressively positive: Up volume accounted for 98% of total NYSE volume while advancing issues outpaced decliners by a ratio of 6.7 to 1. There have only been seven other sessions since the market bottomed back in March 2009 that have had a higher number of net advancing issues. This is a sign of intense buying interest.
In the days to come, it’ll be important to carefully watch volume and supply and demand trends to judge the strength and likely longevity of this rebound rally. Simply relying on today’s big price gains isn’t enough. Stay tuned. Assuming this is the real deal and a sustained uptrend is at hand, I think the best opportunities will be in energy, materials, and foreign stocks. The easiest way to get exposure is through the Energy SPDR (XLE), iShares Emerging Markets (EEM
), and the United States Oil Fund (USO) ETFs.
