It’s hard to believe that it was only a few weeks ago that the media was screaming Chicken Little. At the time I very decisively let you know that the sky is not falling … at least not yet.
Since I wrote that article on February 12, the S&P 500 has rallied 9% in just a few weeks.
So … exactly what kind of legs does this current rally have? How high can the stock market go?
Let’s take a look.
My TradeStops SSI indicators continue to suggest that more trouble lies ahead for the broad stock market. The Smart Trailing Stop was hit back in August 2014; the Smart Moving Average trend is decidedly negative and the S&P500 has put in new lows since originally stopping out.
This recent rally hasn’t changed any of that.
But a lot can happen between here and the next bear leg down – more than most bears are probably prepared to accept. I believe that we could very easily see the stock market rally another five or six percent from here.
One of the main reasons I believe this rally has long legs is because of the Commercial Commitments of Trader data (CCOT). I’ve written about CCOT data many times, including in the article linked to above. If anything, the bullish case being made by this indicator is only getting stronger.
I don’t want to scare you too much here, but we really haven’t seen this level of bullishness from institutional investors since the correction during the summer of 2011.
While I’m not expecting another four year bull run to follow this CCOT peak, I do think that the above chart should give all bears serious cause for concern … and give the bulls reason to cheer.
But the bulls have their work cut out for them if they ever hope to break through the heavy overhead volume between 2,100 and 2,150. It’s likely to take a Herculean effort, which I believe will likely fail.
There’s also a short-term wind at the back of the bulls according to my proprietary cycles indicators.
All three of the strongest time cycles for the S&P 500 are bottoming right now. The red circles on the above chart show similar times from the recent past but we haven’t seen such a clean convergence of cycle bottoms as we’re seeing right now. The cycles suggest that this rally could easily continue through mid-April.
Finally, when the broad market is giving mixed signals, like it is certainly doing right now, it’s a great time to focus on the strongest stocks. Constellation Brands (STZ) continues to be one of my favorites. It recently had one of its rare dips into its Low Risk Zone and has risen right back out of it with strong support from its Smart Moving Average.
To sum things up … keep a close eye on the exits, but don’t be surprised to see the current rally last longer than most of the bears think it should. That, after all, is the way markets work!
Richard M. Smith, PhD