What a Run!

The markets continue their advance riding the Feds daily pumping of freshly minted billions of new dollars. The S&P 500 has now been up seven weeks in a row. That’s never happened before! Equally unique is the fact that the S&P has not fallen below its ten day moving average for thirty straight trading days. That too, has never happened before! The Dow Jones Industrial Average has also been up for seven straight weeks. Both indices have been up eight of the last nine weeks, with the S&P up 17 of the last 20 weeks in a row. That’s pretty impressive! However, that type of performance strongly argues that this powerful rally is most likely over-extended and overbought.

The major indexes are extended far over their 200-day moving averages. Usually they have some sort of pullback, at least enough to test the support of their historical averages. Even through the strongest of bull markets, normal ebbs and flows to and from their long term averages happen. We are currently overdue for a retraction. From the current levels a retracement just to the 200 day moving average would be around 11% for the S&P 500, and 14% for the Russell 2000. That would erase much of last year’s 12.8% gain that the S&P had for all of 2010.

Another interesting scenario is that of the dollar / gold relationship. The dollar was down this week, but gold was down as well. Lately those trades have moved inverse to each other. Long bonds also continued to see outflows. The biggest sector hit this week was taken by municipal bonds. Fears that state and local governments are on the verge of default, as well as fears of rising interest rates took its toll on muni’s once again. The municipal market much like real estate is very localized. Therefore not all muni’s are bad and there probably are some great deals to be had – but that is a topic for another time.

The stock market has too many bulls and too much complacency. The AAII & II bull to bear numbers are flashing record optimism. The VIX shows no fear. While the market continues its ascent we are still invested long. However something does not feel quite right to some savvy professional traders. A change will most likely happen soon. It would be wise to lighten up when some more sell signals occur and pivot points are breached.

For the S&P 500 a drop below 1250 might be a cause for concern. The Russell 2000 below 777 would trigger a defensive move and for the NASDAQ Composite below 2640 should also warrant protective action. When the majority of investors are on only one side of the trade with no concept of fear due to an imaginative Fed, sometimes unintended consequences come along that rebalance the market. Be careful – the markets are currently over-extended, overbought AND over manipulated.