Sounding the all-clear, but for how long?

Mid-week market update: It’s time to sound the all-clear signal, as least in the short run. Both the S&P 500 and the equal-weighted S&P 500 have decisively staged upside breakouts through the falling trend line. The bulls have regained control of the tape.

The next resistance test is the 50% retracement level at about 5500. How far can the relief rally run?

Here is the bull case. Insider activity is suggestive of a bottom. Insider buying (blue line) came within hairs of insider selling (red line) on two occasions in the recent past. While these are not always definitive signs of an intermediate bottom, they are nevertheless constructive signals.

 

Goldman Sachs prime brokerage reported that systematic hedge funds had cut U.S. equity exposure to levels not seen since the COVID Crash. A market rally is likely to set of a short-covering stampede that could propel prices substantially higher.

I am back on a Zweig Breadth Thrust signal watch. ZBT buy signals are extremely rare. There have only been eight signals since Marty Zweig unveiled his trading signal in the early 1980’s. Of the eight signals, they have a 100% success rate on a 6 and 12 month time frame.They require market breadth, as measured by the ZBT Indicator, to rise from oversold to overbought within 10 trading days. The 10 day window terminates on Friday.

Here is the case for a bear market rally. Jeffrey Hirsch at Trader’s Almanac is calling for a bounce with the “duration of strength from around now through sometime between
early June to early August”.

 

Three factors are driving the stock market’s price action right now:

• Normal macro data and earnings report news
• Trade war news
• Anxiety about the stability of the USD

While the relief rally was sparked by “not as bad as the market expected” trade war news and Trump’s statement about he isn’t seeking to fire the Fed chair, the economy isn’t out of the woods just yet. The economic pain from Trump’s tariffs will be felt soon on Main Street. Shipping volumes are plunging and supply shortages will be evident by May and June. It was only about a month ago that a Pittsburgh-based Howmet Aerospace, a key supplier to Airbus and Boeing, declared force majeure on its contracts owing to the new tariff regime (see Force Majeure).

Credit spreads are widening. Though levels are not alarming just yet, when does the market re-focus its attention on the deterioration in financial conditions?

 

Jurrien Timmer at Fidelity offered a even darker short-term path by comparing the current trajectory of the S&P 500 to 1998 LTCM Crisis. In 1998, the market reached an initial low, rallied to the breakdown level and weakened soon afterwards to re-test the old low.

 

If history were to follow the 1998 template, watch to see if the S&P 500 can breach resistance at the 50% retracement resistance of 5500. As well, watch global fund flows to see if investors are still deserting the U.S. market. Continual selling pressure on USD assets will be a signal of a short-lived relief rally.