Bear Market Rally in a Bear Market Rally

Editor’s Note: The monthly Insights was released over the weekend. For those not on the distribution list and wishing to receive a copy, please send an e-mail request to wmgallc@gmail.com.

Fun Fact: The S&P 500 gained 0.5% on Tuesday. That strength was not surprising. On Monday the index closed right at the session’s high. Historically, that happens less than 5% of the time. But when it does, the next day has followed through 85% of the time.

Both breadth and volume ratios were solidly positive again on Tuesday. However, total volume fell 11% from Monday’s already low level. As such, turnover continues to languish below its declining 21-dma.

NYSE Consolidated Volume with 21-dma

Near term momentum has a bullish bias, and we continue to think that this condition has the potential to exist through the month. Nonetheless, the “500” is still below the dominant downtrend line from the June 11 high; that line is just above 916 and declining by 1.74 per day.

Sentiment has improved somewhat. In our recent monthly, we described the sentiment background as neutral to positive with only the 10-day CBOE put/call ratio in overbought territory. That indicator is now viewed as neutral.

Tuesday’s rally increased the evidence that the decline from the June high will prove to be a corrective or counter trend event. If so, then we would need to be alert for a rally back to or through June's 956 benchmark. In that regard, a rally through 932 in coming days would confirm the corrective nature of the June-July decline.

However, given the body of evidence associated with the intermediate background, we remain inclined to treat the potential for a challenge of June’s high a suitable only for the more aggressive traders among us. Intermediate momentum is likely to have a bearish tone into late September, the 22-week cycle remains down, and the structure of the rally from March’s low is, itself, corrective. All of this suggests than any near term strength will be a bear market rally within a bear market rally. That is a recipe of more and greater negative divergences than those that already exist.

The 879-866 range remains tactical support. If breached, the door would be open for further weakness toward at least 812-777.