Depending On If Bulls Or Bears Win Around 2800 On S&P 500 Can Be Telling

After the October-December rout, US stocks rallied big in January and February-to-date. Several data points such as consumer and investor sentiment followed suit, but their rise has been muted. For longs, this could mean there is room for more strength, while for shorts this diminished enthusiasm could signal renewed weakness ahead.

US stocks exploded out of the 2019 starting blocks. Year-to-date, the S&P 500 large-cap index is up 10.7 percent. We are a month and a half into the year! From the December 26 low, it is up 18.3 percent. This preceded a 20.2-percent decline that began on October 3.

During that 13-week decline, one after another support gave way. Bears were crushing it. The recovery since late December has been no less impressive.  Bulls deserve kudos. They not only recaptured the 50-day moving average plus 2600-2630 but also the 200-day, which was retaken last week. The index (2775.60) is now within striking distance of 2800 (Chart 3).

For most of last year, the S&P 500 bounced up and down between 2800 and 2600.  After the selloff began early October, sellers showed up at that resistance three times in the next couple of months – mid-October, early November, and early December. This level is worth watching – particularly considering how overbought prevailing conditions are.

The percent of S&P 500 stocks above the 50-day has gone from one extreme to the other – in no time. Back on December 24, this metric dropped to 1.2 percent, which was the lowest since August 2011. This, along with several other oversold indicators at the time, paved the way for the rally that began late December. Now, the pendulum has swung the other way.

Last Friday, 92.2 percent of S&P 500 stocks were above their 50-day. This was the highest reading since early April 2016. As Chart 2 shows, once things get this high, it is nowhere to go but down.

The rally in stocks the past month and a half has been accompanied by an improvement in several indicators.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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