How far can the relief rally run?

Mid-week market update: I have been calling for a relief rally, followed by a deeper correction (see Why I am both bullish and bearish). The relief rally seems to have arrived as the S&P 500 breached the upper trend line of a falling channel while exhibiting improvements in new 52-week high breadth.



How far can the rally run?



Lessons from recent history

Here are some lessons from recent history to consider in setting minimum rally objectives. The NYSE McClellan Oscillator (NYMO) reached an extreme oversold reading last week when it neared the -100 level. The last three times NYMO reached -100, it always staged a relief rally. Each time, the reflex rally retraced at least 50% of the decline. As well, the VIX Index fell to its 20 dma.



What does that mean in the current instance? A 50% retracement of the decline translates to  roughly 4470, which is just above the 50 dma of the S&P 500 at 4460. The VIX Index just stands above its 20 dma. In other words, there’s a bit of possible upside left when setting a minimum upside objective.



Sources of volatility

Two key events are sources of near-term volatility. The main event after the close today is the earnings report from Nvdia, which beat expectations. The stock is trading at 44 times sales and option traders went into the report positioned for a bullish outcome.



Investors will also be closely watching Jerome Powell’s speech at Jackson Hole Friday morning for any hints of shifts in monetary policy. Former Fed economist Claudia Sahm believes that the speech will be big yawner.


Powell will strive to be as boring as humanly possible in his speech. He will repeat, some of it word for word, what he said at the last FOMC meeting or last FOMC minutes—which are released three weeks after every meeting…


There’s a good reason not to get creative. Powell, as Chair, speaks for the FOMC, not himself. There are two major data releases—employment and CPI inflation—before the next vote in September. Why box the FOMC in when you don’t have to? His speech will be short; we will learn nothing from him if all goes well.


If Sahm is right, a non-speech from Powell could spark a risk-on stampede. The bond market had taken fright at the stronger than expected growth figures coming from economic statistics. A boring speech could calm markets and spur bond prices to rise and better valuation support for stock prices.


My inner trader is still long the S&P 500, but he is edging towards the exit. The usual caveats apply to my trading positions.


I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account.  Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclosure: Long SPXL