June 29, 2017

One Sign the Rally Has Matured

The market rally over the last five months has been, well, fierce to say the least.

During the first quarter alone the major market indices rallied over 10%. The advance marked the 13th time since 1928 that the S&P 500 made it above the 10% threshold in three months.

But how did the market fare after such a nice run?

The wonderful folks over at Bespoke Investment Group published the following chart today that gives us some insight into what we should expect going forward.

 

 

 

 

 

 

 

 

 

As you can see, by most accounts the gains for the rest of the year were limited. Of course, there were a few outliers, but for those of us using strategies based on high-probabilities of success, the margin for error created by the strategy should bode well as we move throughout 2013.

On another note, after leading all of indices for five months the Dow Transports are showing signs of fatigue….followed by the brokers. In fact, we are starting to see a Dow divergence and it could prove to be the first sign of trouble for the bulls.

The leading proponent of Dow Theory (which I don’t follow), Richard Russell, warned in The Wall Street Journal, “It would not be a good omen if the transports were to break down.”

However, someone I do pay attention to is Jason Goepfert.

Last Thursday he pointed out that there have been three occasions when the S&P 500 traded for two weeks near a 10 year high and every time the index went on to make new highs. Although, the celebration ended quickly as two out of the three occasions quickly turned into major bear markets.

As Mr. Goepfert states, the sample size is small. Moreover, the bearish tendencies do not necessarily mean that we are about to enter a bear market, but being prepared for a correction would be prudent. Remember, the gains I stated earlier. Couple those with the four year bull run we have experienced and you can quickly see why the pot odds lean with the bears.