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A Bull Trap?

Today, US stocks were finally able to stage a rally that lasted from opening bell to the close. That has not been the case for a very long time. Remember, a one day move does not make a trend. We need to see if the bulls can even hold this rally for more than a day. Our feeling is they likely will be able to.

The market had reached a severely oversold condition (and held that condition for many days). The number of stocks below their 20-day moving averages has held at extremely low levels for two weeks now.

Once the relief begins, it should have at least some staying power for the next week.

As we head into month and quarter-end which is only a week from now, I would not be surprised to see a relief rally last into that strong buying period for institutions. Assuming that is the case, I would see the start of April as a potentially strong opportunity to fade the market (or atleast move to cash) once again.

Volatility Indexes remain high with elevated implied volatility much higher in the current months rather than further out in the year. The equity-only put-call ratios moved higher once again yesterday. They have not yet signaled any sign of budding buy signals. Both remain oversold and on sell signals.

Market breadth was pinned extremely positive today. This will likely result in a “90% up day” and thus a one-day sell signal! These extreme positive breadth days within a downtrend have been great momentum sell signals. Again, we’ll see if the bulls are able to hold this one this time.

The US government is likely to pass a fiscal stimulus bill and that will bring us right into the strong buying period for institutions converging with month, and quarter, end. This may present a favorable opportunity to fade any uptrend in early April.

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