Tune Out the Noise—Here's Why Yesterday's Rally is Fizzling

Did you catch that relief rally?

Most market rallies are like shooting stars these days. Blink and you miss ‘em.

But yesterday was different. The major averages jumped over 2% after turning in a hellish start to the year. Now the S&P 500 is only down about 6% year-to-date!

You’re probably saturated with market commentary right now. From the finance pages to the evening news, the noise can become too much.

So we’re going to try to shut off the noise. Today, it’s all about the facts. Because frankly, all of this manufactured panic is giving me a headache…

After all, it’s silly season in the mainstream financial press. This Einstein on TV the other day told everyone he’s buying stocks barring a terrorist attack—falling markets be damned!  Not exactly the most thoughtful strategy getting tossed around right now.

Heck, these talking heads can’t even agree on the terms. Is a 10% fall from the highs a pullback or a correction? Is a 20% drop an official bear market or the beginning of the apocalypse?

It’s just talk. All of it. They can argue about 10%, 15% or 20% drops in the S&P till sundown if that’s how they choose to spend their oxygen. But forget ‘em. If you really want to understand what’s happening in the market right now, pay attention to what stocks are doing under the surface.

And right now your average stock is growling. And its claws are out…

A typical bear market has already begun once 50% of S&P stocks are 20% lower than their one-year highs, according to the minds over at Ned Davis Research. As of this week, we’re knocking on the door—or should I say, den. Nearly 50% of S&P 500 components are 20% off their highs.

The average S&P stock is downright ursine

Living on the Edge

Does this mean markets are definitely headed for a crash like 2008? No. There isn’t some magical “crash indicator” that can pinpoint a major market disaster before it happens. But we do know that real McCoy market crashes are rare—and they certainly hurt a lot worse than a 10% haircut.

As of early this morning, yesterday’s rally looks like it was nothing more than a much-needed oversold bounce. Remember, down markets can produce some incredible rallies as eager traders jump the gun on bullish action in hopes of getting in at the bottom and short sellers buy shares to take profits.

But a relief rally won’t turn into anything more without some positive follow-through and new market leadership emerging from the wreckage. But due to some nasty headline risk from China and plunging oil, we just don’t see that happening this week. The bears are taking control.

Going forward, the market’s reaction to the big headlines should give us some clues. If stocks are able to shake off negative news courtesy of China, oil, or even Fed jitters, we could see something more than a relief rally in the coming weeks.

But keep this in mind: the 2014 lows are within spitting distance. Any major slipup here could lead to the next leg lower.

Let’s keep our powder dry while stocks lurch toward another red day…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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