Saturday, May 30, 2009

Was Friday's Late Rally the Start of Something Big?

I received quite a few emails asking my opinion about Friday's late surge in the stock market averages, which saw SPY touch a post-crash bull high before pulling back slightly below its prior high of 5/8/09.

The long and short of it is that I don't see good leadership in the recent strength. For example, Friday's market registered 1401 new 20-day highs against 351 new lows across the NYSE, NASDAQ, and ASE. That compares with 2862 new 20-day highs and 224 lows on May 4th and 2199 highs and 245 lows at the closing price high of May 8th. At least for now, fewer stocks appear to be participating in the strength.

The chart above may help to explain why. I've charted the relative performance of three key sectors--financial stocks (XLF), homebuilding stocks (XHB), and consumer discretionary stocks (XLY)--and plotted that from the May 8th price high to Friday's close. What we can see is that, throughout most of May, these sectors have underperformed the S&P 500 Index (SPY).

Conversely, the more defensive health care (XLV) and consumer staples (XLP) sectors have outperformed SPY since that time.

It seems to me that if the market is discounting a lasting recovery, we should see continued leadership from the beaten down financial, homebuilding, and consumer discretionary shares. Stated another way, it is difficult to imagine a sustained bull market in which we don't see optimism expressed toward banks, housing, and the consumer.

An opinion contrary to the late Friday exuberance is that, with the falling dollar and rising Treasury/mortgage rates, not to mention the prospect of reflation/inflation, the stock market is beginning to see greater leadership from defensive sectors than from growth-oriented ones.

Friday's rally may be the start of a big upside breakout; if so, the indicators that I track weekly on the blog and daily via Twitter should capture the expanded momentum and participation on any follow through next week. For now, however, I remain agnostic.


tryittry said...

Hi Brett,

On the orther hand, the NYSE Percent of Stocks Above MA200 is already significantly higher than May 4th or 8th now. Not sure which one is more reliable.
Although friday bond price shoort up dramatically, the morgage rate up 1% almost overnight. Everything is going up except dollar. Something must going on.

heywally said...

That spike in the ES in the closing minutes was unlike anything I've seen in a while. It was so rapid, it seems like it must have been initiated from one source and of course, many stops were triggered at that 'obvious' resistance level:

Joe said...

Hi Brett,

I am Joe from Hungary, jumping in for a quick comment:

I believe you are probably right with your analysis.

I also noticed the weakening leadership, the moves toward
conservative instruments...

But most of all, my great Daily predictor gave me a strong Bearish signal.
I was still hesitant to open a short position, because I usually don't buy that signal for the weekend and for holidays, when we have multiple days till the next business Day.

But after the huge Up spike and a move even further in after hours, I opened my short position on the NASADQ100 inverz fund (QID), even below the closing prices, as I opened after regular trading hours, when the push continued upward in the indexes.

My predictor tells me that I have above 84% chance on Monday to make a profit with that short position.

The weekly predictions are still Bullish for all indexes for next week, so my position size is a bit
below average.

My Monthly predictor is Bearish for all six major US indexes that I follow with my predictor.

I was a bit surprized to see that big spike. I also attributed it to some limited source, on limited information.
I was wondering how the Ultra fund managers balance those funds on these kind of Days.



Curtis said...

I agree with your analysis.

My Sentiments
I think that bullish optimism is reaching an apex now. Watching from the sidelines the drivers for Friday's rally I think came from the energies. I also feel that people wanted to cash in on the recovery next week. A lot of people were playing the bearish case due to NK but nobody took it serious. It seems most people are assuming Nk posturing is due to internal succession. A more ominous consideration is that what's his name wants to leave a "legacy".

What I will be watching for

I will be watching the chips and retail oriented stocks to see if they continue to climb. I will also be watching the energy sector.

Most of all I am looking for a reversal in recent bullish/bearish day logic. This would see us have some bearish days first of next week and then strength into the end.

abel said...

Regarding Friday's late-day lift-off, it may be applicable to link the post above, that Brett posted 5-27-09, SLP...looks like someone took it to heart!

Well whaddya know?!

Swing Trader said...

Nice analysis doc, comparing SPY with XLF, XHB and XLY

It's interesting that when SPY made a new high close on May 8 (92.98), XLF also closed high (13.02) whereas XHB and XLY were already indicating possible weakness, closing lower than previous peak 1-3 days prior. The weakness were good indicator of shorting opportunities then in hindsight.

We now have an even weaker situation today, compared to May 8. Logic would suggest that Friday May 29 would have been an even more compelling short than on May 8.

Therein lies the dillemma - it is obvious ... maybe TOO OBVIOUS??? Does the market gives such obvious opportunities?

Anyway, short term trading is very much an odds game, so, I went with the odds, and bought some FAZ (a bearish financial 3X ETF) - it is a smaller position than usual. In short, I am bearish for the very short term, as I believe such spikes needs to come down first before they can go up again ......

One can try to logically argue that if SPY's bullishness is just once off, then, it would make sense to short the weak sectors, which would include XLF.

However, the risk is that if the bull turns out to be genuine, then, XLF could run up fast as it would then be considered a "laggard".

Therein lies the problem with logic. Logic works both ways and can be argued both ways.

Again, I would rely on managing the size prudently, and trade with the odds.

Thanks for the great article as usual.

MacroCall said...

For the bullish case, the semis are very strong and seem to be the edge of breaking out. It's an interesting time.

Watson said...

When there is a spike near closing, in your experience what does it usually mean? institutional buying? it would be interesting to be able to see which sectors were most bought during this late day rally. If you are correct about the financials and constructions, we may see a fading of demand going into next week.

However, Im curious as to why you must see growth within these key areas as an indication of a sustained bull market. Fundamentally it makes sense, but there have been several rallies led by materials and technology among others. Actually if I recall we haven't seen interest in the financials for a few weeks now.

Thanks for the post. Always good to hear your thoughts

Rick said...

I'm not a seasoned market watcher so I don't know how unusual Friday's last-minute spike truly is, but why would anyone execute that much volume in such a short period of time, essentially guaranteeing a lousy exectuion by driving price up that quickly? PPT and GS conspiracy theories aside, that just seems like a very conspicuous way to execute any legitimate trade theory. The only reason I can come up with is if you are very, very confident the market will be higher on Monday.

Whether this augurs bullish sentiment or not, this does not seem like a market that is behaving in a healthy fashion.

Neboxian said...

considering the last trading day of the month this monster spike smells like some Big Boys got their shorts yanked off...this action automatically triggered stop orders to cover at these very critical market resistance levels forcing the price up even more...