Is This A Bear Market Rally?

Once a bear trend rally begins in overbought territory, especially following a rough sell off against a backdrop of great fear as we saw in January through mid-February, the counter cyclical rally is likely to be explosive until it hits key resistance – this is because there are a lot of traders covering their short positions.

We saw more of the same on Wednesday as the stock market continued to advance, initiated last Friday and triggered mostly by short covering in fast market conditions. Get used to this because bear market rallies are violent events within bearish patterns of lower lows and lower highs.

The first key resistance level for the S&P 500 index is at its “simple” 50-day moving average, which is at 1,960 and it is at that juncture traders will decided whether to continue to squeeze the shorts higher or add new short positions for another leg down.

In technical terms, especially in bear markets, the 50-day moving average is descending well below the 200-day moving average. And right now, we have a confirmed bear market until proven otherwise.

Of course, this is just one resistance level and where we go from here I think depends a lot on whether oil prices can break out of a strong bearish downtrend. Crude oil prices had another nice rally today as the financial powers ramped oil prices to the $31 range. But here again, WTI prices are still very much in a bearish pattern of lower lows and lower highs. Until we have a confirmed bottom in oil, it is hard to be too optimistic about the stock market in general terms – because both oil prices and junk bonds remain in a bearish downtrend.

Temporary Industrial Production Bump Amid YOY Decline

Today, we learned that Industrial Production improved from -0.7% in December to a +0.9% in January. What cause the positive change came from the “utilities” sector which in December was -2.9% but in January jumped to +5.4%! Yet, here is the problem, while we saw a +0.9% increase in the Month-over-Month number, the Year-over-Year number continued to fall, dropping to -0.7% YoY, marking three months in a row of negative numbers.