First the good news. The DJIA, S&P 500, and Mid-cap indices all closed at new all-time highs yesterday. In addition, most of our trend and internal momentum indicators are green, which is to be expected at this point in the game. On that note, our 10-day advance/decline indicator – which is designed to measure “oomph” in market breadth – hit the highest level yesterday since early 1987. Next, the earnings recession, which now spans five consecutive quarters is expected to improve during the current reporting season. And finally, history shows that breakouts that have occurred after a bear market have tended to be quite positive for the next year.
Now for the bad news. Stocks are overbought from both a short- and intermediate-term perspective. Our short-term sentiment model moved into the danger zone yesterday – meaning that some froth is developing. The cycle composite suggests the action should be sideways to down over the next week and a half. Our VIX and Mean Reversion models have both moved into their respective negative zone. And the new bond king, Jeffrey Gundlach of DoubleLine Capital, is calling the current bond market and yield search a “mass psychosis” (oh, and by the way, Germany sold 10-year bunds this morning at negative interest rates for the first time in history and Switzerland sold bonds maturing in 2058 at an average yield of 0.023%).
So, while prices are moving up at the present time in anticipation of additional central bank stimulus and an improvement in the U.S. economic picture, I’m waiting to see how this market acts during the next pullback. This will be my “tell” as to whether or not this breakout is for real or just the latest in a long string of fake-outs.
S&P 500 – Daily