The major averages continued their push last week with the S&P 500 finishing higher by over 3%. It marked the 4th consecutive week of gains for the index - the first time it has done so since the autumn of 2007 in the lead-up to the all-time highs. To me, this is a clear sign of the underlying strength of this rally. As such, it should be looked at differently than the previous bear market rallies we have seen thus far:
March-May 2008 (10 weeks - 15%)
November-January 2009 (8 weeks - 27%)
March-??? 2009 (4 weeks - 27%)
But before you start to believe the media's claims that the market is starting to look "normal" again, be sure to try and recall what a "normal" bull market felt like. Prices rise gradually and incrementally. The last 4 weeks have been marked with nearly a 10% range or higher between the high and low point. This tells me that nobody really has any idea what these things are worth. They're just closing their eyes and buying. And this phenomenon is far stronger for individual stocks where the weekly ranges can regularly exceed 20%. Below is a chart of the VIX (Volatility Index). We can see that even though it has closed under the 40 level for the first time in a long time, it is still above what I consider to be the "point of recognition." And while the previous two bear market rallies I mentioned above saw decreases of 50-60% in the VIX, this rally of equal size has only experienced half of that.
The VIX is a measurement of forward implied volatility of options prices. It is telling us that in either direction, this market is going to remain volatile. I do expect this index to drop further as the rally progresses. This will be a prerequisite to convincing as many people as possible that the bear market is finished before it rolls over again.
If I were a bull, one factor that would have me concerned is the lack of participation over the last two weeks in the financials. This comes on the heels of another trillion in taxpayer gifts courtesy of the PPIP and more assurances from the G20 to "do whatever it takes" to rob the average person for the benefit of the banks. Not even that was enough to push prices over their mid-March highs. Think about that. The market obviously sees through the futility of trying to put out a forest fire with a garden hose.
The Euro and Canadian Dollar bounced back strongly last week. But not strong enough to clear any major moving averages that would signal a significant move higher. Strong followthrough this week might change that. I wouldn't be surprised to see a tight trading range for a number of weeks.
The precious metals complex appears to be rolling over. Gold has made an 11 week closing low. It's close was under the 20wk EMA for the first time since early December. It should also be noted that seasonality is now working against the PMs. My target remains below the October lows.
That's all for now.
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