As you all know I have had a bearish tone since mid-January. The market had moved into a short-term overbought state, excessive optimism had pushed into the market and seasonality had entered a historically bearish.
Over the past several weeks all of the aforementioned have pushed further and further into a bearish state. But, the bulls have yet to waver and the grind continues. Since December 19th the S&P 500 (SPY) has climbed over 12% without pause.
However, as we all know this is how it works, the market grinds higher and crashes lower. It's like stacking pennies and now the stack has reached 50 pennies high and it's teetering.
I am not calling for a crash. But let's be real. The market can't sustain this push. Of course, this rally could be an anomaly and the market pushes even higher over the next few months. Why not? 20% in two months? I think we all know what the probability of that type of move is and the percentage isn't high. And remember, it's all about the probabilities.
Interestingly enough, it brings back a Wall Street adage that has stuck with me since the beginning of my trading career:
"If a stock makes a large move (over 10%) in a single month period, the odds are greater than 2 to 1 that it will move in the opposite direction in the next monthly period."
Will this be the case in February for the major market indices? There is no doubt that the risk is to the upside. I think we all know we could easily see $127.50 in a matter of days on the S&P. It doesn't take long, once the selling begins particularly when the conviction to the upside has been lacking as seen by the low volume advance.
Just more food for thought.