How Meaningful Is The Recent Rally In The U.S. Stock Market?

Over the past 7 trading days, stocks in the U.S. have gone up 5 days. That could sound exciting, but how meaningful is the recent rally?

If anything, market sentiment is bad enough to call for at least a relief rally, or even a retest of the 2015 highs. As Sentimentrader indicates, “buying interest has been so lopsided last week that the Down Pressure reading for the S&P 500 has averaged only 7% over the past three days. Since 2002, there have been only three days when the 3-day average got this low: 2009-01-02, 2010-09-03 and 2011-10-06. All occurred during pushes off of extreme pessimism.”

Chart-wise, we see that the S&P 500 has bounced right at double support: one support line connects the 2011 lows with the 2016 lows, the other one connects different swing lows since 2014. There is sufficient support in this area to justify a bounce. The bigger question is what will happen around 2020 points, which is the 90 week moving average (the moving average which gauges the long term trend).

Market breadth is supporting a relief rally. The number of advance minus decline issues is only recovering from deeply oversold levels. Currently, the environment is still negative, and that will not change until the number of advance issues starts surpassing the number of decline issues.

From a secular perspective, we stand in a corrective area in the midst of a secular uptrend, as indicated by area “2” on below chart. There is not much more to say from a long term perspective. Watch how support area 3 is becoming smaller, which calls for strong support between the 1200 and 1600 area.

CONCLUSION:

From a secular perspective, the S&P 500 could go both directions currently. That is why the shorter term timeframe is much more important at this point, and investors should focus on the price movements between the 1900 and 2020 area. Pessimism has been quite extreme, so that could support a contrarian bullish stance. Still, our risk indicators (see here and here) suggest to take a defensive stance until the market clears 2100.