Is This A Bear Market Rally?

Once a bear trend rally begins in overbought territory, especially following a rough sell off against a backdrop of great fear as we saw in January through mid-February, the counter cyclical rally is likely to be explosive until it hits key resistance – this is because there are a lot of traders covering their short positions.

We saw more of the same on Wednesday as the stock market continued to advance, initiated last Friday and triggered mostly by short covering in fast market conditions. Get used to this because bear market rallies are violent events within bearish patterns of lower lows and lower highs.

The first key resistance level for the S&P 500 index is at its “simple” 50-day moving average, which is at 1,960 and it is at that juncture traders will decided whether to continue to squeeze the shorts higher or add new short positions for another leg down.

In technical terms, especially in bear markets, the 50-day moving average is descending well below the 200-day moving average. And right now, we have a confirmed bear market until proven otherwise.

Of course, this is just one resistance level and where we go from here I think depends a lot on whether oil prices can break out of a strong bearish downtrend. Crude oil prices had another nice rally today as the financial powers ramped oil prices to the $31 range. But here again, WTI prices are still very much in a bearish pattern of lower lows and lower highs. Until we have a confirmed bottom in oil, it is hard to be too optimistic about the stock market in general terms – because both oil prices and junk bonds remain in a bearish downtrend.

Temporary Industrial Production Bump Amid YOY Decline

Today, we learned that Industrial Production improved from -0.7% in December to a +0.9% in January. What cause the positive change came from the “utilities” sector which in December was -2.9% but in January jumped to +5.4%! Yet, here is the problem, while we saw a +0.9% increase in the Month-over-Month number, the Year-over-Year number continued to fall, dropping to -0.7% YoY, marking three months in a row of negative numbers.

While the media might be cheering the positive MoM number, they certainly aren’t pointing out this statistic. In 17 of the 19 times in the last 100 years that Industrial Production has contracted for 3 consecutive months in a row, the US economy has entered recession.

As you can see from this chart, this economy is not healthy as we dip into contraction. Just yesterday, New York’s Empire Manufacturing Index continues to decline in contraction at -16.6.

Today, the Fed’s minutes were released in which the Fed seems to be taking the position they want to see “direct evidence” that inflation is rising towards 2% before they will back another rate hike. For that to happen, oil prices will have to bottom and begin advancing whether in the spring time or later in the year but commodity prices have to inflate for there to be inflation and before we’re likely to see another rate hike.

Saudi and Sunni Allies Amassing Troops

I don’t know if you have read this or not but you certainly need to be aware of the risks dead ahead, as the Mideast risks have become as serious as we have ever seen.

Last week as you might have heard, Syrian forces, with Russian and Iranian help, began encircling the City of Aleppo, Syria. When Saudi Arabia and its allies saw that Aleppo was being circled—and would fall—they soon realized that their entire effort to overthrow Assad would come to naught. Aleppo is a key Rebel/Terrorist stronghold and if it goes, the fight is done for the rebels.

Saudi Arabia and other Sunni allies, according to the Saudi Press Agency, are amassing 350,000 soldiers, 20,000 tanks, 2,450 warplanes and 460 military helicopters in northern Saudi Arabia in a military exercise called “Northern Thunder”. This exercise involves 25 of its “allies”, mostly Sunni nations.

Here’s the thing, there has never been a military exercise that has involved 350,000 troops and 20,000 tanks as well as 2,450 warplanes and then just gone home after the exercise is over. It is hard not to believe what we really have going on is the beginning of an invasion force developing. This supposed “exercise” is to continue through February 28th.

Russia is warning that any nations entering Syria would be a declaration of war and is warning the US, Saudis and Turks in the crucial Aleppo battle to remain “hands off”!

This could get ugly really quick going into March – if not a new war, at least a strong reason to pump up oil prices – and the broader equity markets.