Stocks dived from their recent range at the top of this week, largely for reasons unknown.
While the usual sources of financial infotainment were puzzled at the pullback – citing an absence of negative macroeconomic news – this is in fact a telegraphed “the rally has run out of steam” message. Trader sentiment changes as a function of time, and it is this inability to read the same data consistently that has the greatest impact on market direction beneath the long-term trend. So people have had enough of drinking the government-led recovery Koolaid for now.
What we then look to are combat indicators giving us signs of whether indeed everyone sees this and are still prepared to presevere with a contrarian rally – “climbing the wall of worry”. In such an event watch for a sharp drop as sellers get out quick followed by an equally sharp rebuttal as traders look to get in on the next leg of the rally.
The 2nd scenario is that this is indeed the end of the current rally, whether it then plays out to be a bear market one or the first phase of a recovery would remain to be seen.
So keep an eye on this throughout the week, my thinking at the moment is we’re seeing the beginnings of a summer pull back based on low volume and lack of strong recovery numbers.