OK. I said it. The Rally is over. What a rally it was. While it may live on a little longer, I think that its days are numbered. It's easier to call the economy than stocks, and the economy has been experiencing a dead-cat bounce. I have some charts that I looked at recently, and I think that the likelihood of a normal post-recession bounce is very low. Take a look if you disagree.
Stocks, though, they are much harder to call. This market has advanced much further than I expected, but I am starting to see some divergences. Emerging markets and High Yield failed to make new highs in the middle of August and closed below the 10dma this past week. The NASDAQ is looking tired - three "distribution" days (per Investors Business Daily) in the past eight.
Here is what I am seeing that makes me confident that the days of this rally are numbered (besides the divergences):
- Massive collapse in short-interest
- Equity offering floodgates are about to open
- Insiders are selling
- Even the strongest companies financially aren't repurchasing
I don't know how much further this thing rides on fumes, but I expect the action late in the year to be negative. Hedge funds, the "at the margin" players, will be looking to lock in profits (collect fees) as we sprint to the finish of this wild year. My guess is that they will be selling, as most are up year-to-date. They may be "underweight" but they are long.
I am sticking to my initial call of "down 15-20% for the year", though perhaps I was a bit too pessimistic. Finishing the year down 10% would imply a return to S&P 500 to 812. This would be a 58% retracement of the "Big Rally". Maybe that's too aggresive, but I believe it is directionally correct.
Disclosure: No securities mentioned
