MAR 13, 2018
Stock prices and fundamental reality have almost nothing to do with each other the vast majority of the time. Stocks spend most of their time under or overvalued, besieged by macroeconomic factors, the arbitrary myopia of quarterly results, and any other number of factors.
Likewise, when the stock market is going up, it tells you nothing about the underlying health of the market. At current levels in this melt-up market, all news has been viewed as good news, and ‘mindlessly up’ has been the default setting. Not for long.
The S&P sits at a key technical test point:
Right here it gets very interesting. Tech and various components raced to new highs and in doing so repeated a pattern we saw in March 2000. New highs on $NDX but not on $DJIA.
And indeed various other index components, nowhere near new highs. The rally, as strong as it appears, has major problems in internals, something I highlighted in Broken.
From my perspective the rally of last week, while making perfect sense from a technical perspective, has not rung the all clear. Far from it. There are deep internal issues in markets that suggest that further gains, while certainly possible, may find themselves seriously tested by the pull of history.
In this case this is a rally that bears wanted and want, to alleviate oversold conditions and bring about the negative divergences that have spelled major trouble in the past.