On Tuesday, the S&P 500 convincingly reclaimed the 200-Day Moving Average which by many technical standards means we are back in a “bull” market and that recent downward action has been only a “correction.” We would agree with this, at least for the short term, and our “long” ETF positions have performed well since going to “Yellow Flag” mode.
If the S&P 500 can hold the 200-DMA, which I think it will with some chop over the next few days, we will return to “Green Flag Flying” mode.
Tuesday’s gains came in tandem with a rally in the Eurodollar as the European sovereign debt problems moved farther to the back burner. News wasn’t great on the economic front as homebuilder confidence declined and Best Buy missed earnings expectations but offered a positive outlook going forward.
Retail sales disappointed and Greek bond yields climbed in response to Moody’s downgrading the country’s debt to junk while the Empire Index (New York gauge of manufacturing activity) increased modestly.
Market internals continued to strengthen and so it appears that this new “rally” could have some room to run.
On a short term basis (a day or two) markets remain overbought from recent gains and are subject to more downside.
Most probable scenario is a short pullback somewhere in here, possibly even a challenge of the 200 Day Moving Average, and if that fails and the 200 Day Moving Average becomes support, we could see much higher prices ahead in a summer rally. As we’ve discussed recently, FedEx tomorrow is important as well as the volatility associated with Quadruple Witching Day on Friday.
Disclosure: Long VXX, EWW, IYR, FXI, QLD and XOP.