The global markets approval of the French election results was clear at 6:30 PM on Sunday as the S&P 500 E-Mini futures gapped 20 points higher when they opened. By early Monday the Euro zone markets were sharply higher with several markets up 3-4% as only the Shanghai Composite was down significantly on Monday.
The sharp gains Monday caught many on Wall Street flat footed as the decline from the March high had lasted long enough to discourage many bulls. From a technical perspective the role of a correction is to reduce extremes in sentiment and to cause some to question their market outlook. Some in the media viewed Monday's rally as a possible Trump Trap.
In last week's survey, according to the American Association of Individual Investor, the bullish % dropped to 25.7%, as it had declined for eight weeks in a row. As I commented in last Thursday's Tweet the "levels are typical of correction lows".
Of course sentiment levels must be combined with technical methods in order to identify meaningful tops or bottoms. In my weekend article The Week Ahead: Bullish Evidence Building I reviewed some of the technical evidence that indicated the stock market was close to a bottom.
My analysis of the NYSE stocks making new highs and new lows provided additional bullish evidence. Some may remember how this analysis at the February 2016 low (see chart) indicated that the stock market was bottoming.
The number of stocks making new lows has declined (line d) as the NYSE Composite has been making lower lows. This was a sign of strength and last Thursday the number of new highs reached its highest level since March 17th, line e. The NYSE Composite last week had approached the longer-term support at line c. The completion of the flag formation (lines a and b) has initial targets in the 11,780-850 area.
What does the analysis of the other market averages say about Monday's rally?
The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ: QQQ) has been leading the other market averages higher all year as it is up 13.47% YTD versus 6.56% for the SPDR S&P 500 ETF Trust (NYSE: SPY). This leadership was initially signaled on December 27th by the new high in the Nasdaq 100 A/D line. By early January the relative performance analysis confirmed it was a market leader.
The PowerShares QQQ Trust (QQQ) closed Monday at the daily starc+ band and chart resistance at line a. Therefore a near term pullback would not be surprising. The next upside targets are in the $137-$139 area.
Both the weekly Nasdaq 100 A/D line made a new high last week as the daily A/D line broke through resistance, line c, last Wednesday and is acting very strong. This is bullish for the intermediate term. It would take a drop below the support from the March-April lows to weaken the positive outlook.
The Spyder Trust (SPY) has been significantly weaker since it peaked at $239.28 on March 1st. It closed above the downtrend, line e, on Monday as it formed a doji, closing where is opened. On a move above the resistance at $238.16-$239.28 there is quarterly pivot resistance at $242.74. There is good support now in the $233.31-$235 area.
The strong market internals last week pushed the weekly S&P 500 advance/decline line back above it WMA which was a positive sign. The daily S&P 500 A/D line turned up sharply Monday as it has exceeded the downtrend, line g, and the late March highs. Further strength is needed over the next week to confirm the new uptrend.
In addition to a full economic calendar this week culminating with the preliminary 1st quarter GDP reading on Friday there may be more drama from the White House. The market's reaction to the promised new tax plan and the potential threat of a government shutdown may cause a spike in market volatility.
Therefore a sharp pullback would not be surprising and will likely be used to support the view that Monday's rally was a Trump Trap. If instead the market continues to move even higher there should be a good new entry point in the next week.
The relative performance last week signaled that the small cap ETFs like the iShares Russell 2000 Index (ETF) (NYSE: IWM) and Vanguard Small-Cap Growth ETF (NYSE: VBK) were starting to lead the market. Only a weekly close below last week's low will suggest that the market's correction is not yet over.
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