The S&P did not quite close at an all time high yesterday, but it came about as close as it could without reaching that level on a closing basis...as it missed by only 5 points. In other words, the fact that it was not quite able to give us a new high, there is no question that we are now “testing” the old highs...and whether we can break that level in a meaningful way will be important for the rest of the year.
That said, the S&P does not have to break above it’s old highs in a meaningful way immediately. Don’t get us wrong, if it rolls back over in a very substantial/powerful way, it will signal an important “double top”...which would be very negative (as it was in 2000 and 2007). However, if it saw a pull-back here...even one that took the market down by 5%-7% (or a bit more)...and then bounced back and took out the old highs in a significant way a few weeks from now...it would still be very bullish.
In fact, we have been arguing that it would be much more bullish if the stock market were indeed to see a short-term pull-back (or at least a multi-week “sideways correction”). The market has become overbought...and several of the mega-cap tech stocks have become very overbought, so if the market took a breather now...to work off these readings...it would actually give the stock market more upside potential later this year than it would if it rallied straight up from current levels. Pull-backs (and even full blown corrections) that take place after strong rallies are normal and healthy for any market...as straight-up rallies foster complacency...and complacency is kryptonite for bull markets.
However, there is another reason why we think a 5%-7% pull-back (or even a full 10% correction) would actually be good for the market! As we heard from two different Fed President’s yesterday (Rosengren and Kaplan), we absolutely NEED more fiscal stimulus right now...and this rally in the stock market is allowing the leadership in Congress to play political games with the newest proposal. It is becoming more and more evident that the only thing that will get these people off of their butts and get a deal done would be a meaningful pull-back in the stock market.........That might sound ridiculous, but we think it’s true (and it’s pathetic if we’re correct). Either way, if the S&P fell 250-300 points and the DJIA fell 2,500-3,000 points, we all know damn well that the leadership in Congress from both side of the aisle would finally do the jobs we elected them to do...and get a deal passed.
On a technical basis, as good as the stock market has acted recently, a pull-back that takes place soon is not out of the question. As we mentioned above, the S&P 500 index is getting overbought. Second, yesterday’s strong rally was even more narrow that it has been during most of this bounce. The breadth (advancers vs. decliners) was only 2 to 1 positive for the S&P yesterday. That STINKS for a day when the index moved up by 1.4%. The breadth was even more narrow for the broad NYSE Composite Index...at just 1.4 to 1 positive! We can also see how narrow the rally was by looking at the difference between the breadth on the NDX Nadsaq 100 and the broader Nasdaq Composite indexes. It was a very strong 9 to 1 positive for the NDX....but only 1.2 to 1 positive for the Nasdaq Composite!!!! That shows us how just a few small names in the tech sector were responsible for yesterday’s gains.
We’d also note that the put/call ration DID NOT rise yesterday. Normally, we’d see that as a bullish sign. However, history tells us that when the put/call ratio reaches a VERY low level...like it did last week when it dropped below 0.60...the market does not start to decline until the put/call ratio actually starts to rise! As you can see from the chart below, this is what we saw just before the corrections of early 2018, late 2018 and early 2020.
It’s too early to start saying this is an indication of an upcoming pull-back, but as we said above, we hope it is. Of course, “hope” is a lousy investment strategy, but we just wanted to point out that they are some indicators that are telling us that a further rally from current levels over the short-term is not a certainty or a done deal.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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