Bulls Buy Stocks, As Fed Starts Talk Of Taper

After another rough start to the week, the bulls finally showed up and flipped our “money flow” indicators back to a buy signal. As we stated last week:

“Well, that follow-through failed to occur.Not only did the “buy signal” not trigger, but the market also broke down through the previous consolidation range. As I said, it did not work out as planned. The last exposure we took on is now pressuring the portfolio momentarily, but we should benefit from the turn if we are correct.”

With markets deeply oversold on a short-term basis and with signals at levels that generally precede short-term rallies, the rally on Thursday and Friday was not unexpected. Notably, the S&P 500 held support at the 50-dma and rallied back into the previous trading range. Importantly, we have been focusing on the Nasdaq and building an index trading position over the last few trading days for a rotation from the “reflation” trade back to the “growth” trade. 

On Wednesday, the Nasdaq triggered its short-term “buy signal,” which will likely provide some relative outperformance over the S&P 500. It will be important for the Nasdaq to hold above the 50-dma into next week. If we do get some follow-through, the Nasdaq should get a confirming MACD buy signal as well (bottom panel).

As noted last week, the following statement remains very important:

“We will hold exposures at current levels for now. However, instead of looking for a more extended rally into mid-summer, we suspect this rally will be fairly short-lived.”

We do expect a counter-trend rally due to the liquidations occurring by institutional investors over the previous few weeks. Over the last few weeks, we continue to build the case of a deeper (5-10%) correction by mid-summer.

A Long Time

That view has not changed, particularly given the length of time without one. As noted recently by Sentiment Trader:

“The S&P 500 has gone 134 trading days without even a 5% pullback from a high. That’s among the longest streaks since 1928, and preceded choppy medium-term returns before momentum tended to resume.”

While we are adding exposure, we are not getting overly aggressive. The risk of a more significant drawdown outweighs the reward longer-term, but we are willing to trade short-term opportunities.  

For more discussion and detail on why this is a 3-4 week trade, watch Thursday’s “3-Minutes” video. 

Fed Starts To Talk Taper

The general premise of “bullish investors” is that as long as the Fed is pumping money into the markets, you have to “buy stocks.” As we discussed in “The Market Will Reach 4500,” that has been the right call.

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