The 50% retracement (Black Line and Arrow) of the Bear Market sits right above here at 1,120 (versus today’s 1,091 close). That is a key technical level and may lead some traders to lock in some profits.
Over the last few weeks I have been pointing out how moves tend to be over when price jumps up through the Upper Channel Line (Green Line). If the line holds again, then the next move down to the 50-day (Purple Line) will be a critical test for the uptrend.
As if that weren’t enough, $SPX is now 20% above the 200-day (Red Line). The markets have only been this “overbought” 6 times over something ridiculous like the last 30 or 50 years. I forget which, but the point is that this is a rare occurrence…
So you have a Market that is historically overbought, compressed up against a critical Fibonacci Level and its upper trendline.
But it gets better still. You also have a divergence between Price and two critical indicators of overall Market health – Bullish Percent ($BPSPX) and The Summation Index ($NYSI). That means that as Price is going to higher highs, fewer stocks are powering the market higher.
The rally off the March lows has seen virtually everything go up – over 92% of stocks are now above their 200-day. You are starting to see deterioration in the Technicals and some divergences between Price and key Indicators.
Summation Index ($NYSI) is essentially a longer-term method for measuring the Accumulation and Distribution of stocks. Bull Markets have historically topped out when the indicator gets near 1,600. You can see that 1,140 is a key level for $NYSI. A break below 1140 on the Summation Index would probably be a pretty Bearish event.
Momentum (RSI14) continues to diverge with Price.
As the Bull Market matures over the next few months, I expect to see fewer companies leading the markets higher – I will refer to this as the rally “narrowing”. That will mean fewer sectors going up and fewer stocks leading things higher. Stock and Sector selection will become more and more important as the Bull Market matures and fewer Sectors and Stocks are going up.
Emerging Market Currencies versus the US Dollar
Brazil rocked the markets today, when they announced that they will start taxing new Foreign Capital flowing into Brazil at a rate of 2%. It is a pretty novel idea. The issue Brazil, and the rest of Emerging Markets have, is that they need to raise Interest Rates to slow down their economies. But they know that when they raise Rates, that hot money will flow into their economies, creating Asset Bubbles.
This is the old Carry Trade, where you borrow in US Dollars at effectively 0% and lever up to buy Brazilian Bonds at a substantially higher yield than 0%. Money pours into the economy with higher rates, chasing Yield and sending Asset Prices vertical.
I think this new tax is pretty smart. It gives Brazil the ability to raise Interest Rates by at least 2%, without the threat of a bunch of hot money flowing into the economy overnight.
The ETF for Brazil (EWZ) was down on gigantic volume today (Red Box). Today’s tax appears to be a game changer for Brazil, at these for the near term. Huge volume down days, late in a trend, are often very bearish signs. Hot money will probably now look elsewhere – maybe China, or Australia.
My understanding is that there are a lot of bets right now for Emerging Market Currencies and against the US Dollar. That could be unwound in a hurry. I will continue to watch the Dollar closely for a potential bottom.
All of that said, there are still potentially Bullish setups. I will continue to sell extended and buy breakouts, with tight stops.
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