Over the last eight trading days, the S&P 500 is up 5.3%, the Nasdaq is up 6.7% and the Nasdaq 100 (QQQ) is up 7.5%.
There is no doubt what has driven the gains. The indices, and many stocks, were oversold when headlines hit last week that the Fed had shifted to a more-dovish tone and that President Trump had made some progress on trade with China.
The big gains have pushed the indices into overbought territory, and the pace of buying has started to slow. Unsurprisingly, many short-term traders were inclined to lock in some profits into strength on Monday, and the indices saw their highs at the open. Overnight, Asian markets are pulling back and early indications are for a soft open on Tuesday.
Is the rally over? Are the indices likely to retest recent lows once again?
The bears will tell us that the good news that has been driving the market is nonsense. There is no real progress on trade, the Fed is just delaying the day of reckoning, the political problems faced by Trump are coming to a head and that seasonality stuff can be very misleading.
Maybe, but the bulls have regained the advantage in the past couple of weeks. The price action has improved, key technical levels have been captured and now the benefit of the doubt belongs to the bulls. If the bears are going to make a stand, they will need to prove their point by keeping the pressure on the market.
After the recent move, the logical action for the market is some consolidation. That will allow short-term flippers to exit, longer-term buyers to enter and for bears to reposition. That can occur through some mild pullbacks or through flat action.
Bears have a tendency to jump to conclusions when the market dips. They like to believe that any selling is confirmation of their belief that it is straight down from here. Selling is never viewed as healthy in the minds of the bears.
If the market is healthy and likely to rally into the end of the year, as I think is likely, what we should see is a pause that refreshes. There should be some pullbacks, and better entry points will develop. Too many stocks have seen parabolic moves, and now they need a rest.
The main things I'm looking for to support a bullish thesis are:
- Support levels to form as stocks and the indices consolidate;
- New leadership to develop as market players look for themes and narratives to drive the action;
- Chart setups in individual stocks as stock picking develops;
- Choppy action in the indices as the reluctant bears start to change their minds.
If the bullish thesis plays out the way I think it will, then it will be a good time for stock pickers in the next few weeks. Not only is there positive seasonality but tax loss selling should create some setups as we head into January.
This market has support now from a dovish Fed and progress on trade. If the bears are going to kill it, they have a lot of hard word to do to take out support levels.