After yesterday’s fizzled-out rally, it’s inevitable the investors will ask the next question: Given the lack of resolution in Europe, and the still-mediocre data all around the world, has the market gotten ahead of itself?Dan Greenhaus at BTIG talks about this:
The late day selloff notwithstanding, this has been quite a rally. The S&P 500 has risen by approximately 10% since last Monday’s close, one of the more forceful seven session rallies in post war history (top instances include August 1982, March 2009, October 1974 and just to make this interesting, March 2000). On average, these types of moves tend to be associated with less than stellar five day changes, but pretty good one and three months changes. This plays into our theme from the last few days; that perhaps the rally we have been yearning for — the performance following five down months and three consecutive 1.75% gains for instance — has finally unfolded.
While we have been making the case for just such a rally, and believe further upside may yet lay ahead, we stop short of sounding the “all clear” signal. We have been arguing that the 20% drop in U.S. equity prices and nervous trading thereafter reflected the pricing of outcomes that, in the immediate, were not in our framework, particularly an imminent U.S. recession and possible departure of Greece from the Euro Area. Indeed, we repeat that the impetus for the equity decline was the GDP revisions which suggested the U.S. was on the verge of a recession, a position we forcefully rebutted and which now looks correct. This type of dichotomy often presents an exploitable trading opportunity and we had hoped to take advantage of just such an instance. This has, to varying degrees, played out however, the failure of today’s rally at the 1218-ish level, the closing high from Aug 31st, certainly raises the possibility that this rally may have run out of steam for now.