We have always liked the clip from the movie Animal House where in the “Deltas on Trial” scene the smooth talking Eric “Otter” Stratton get up and says, “Point of parliamentary procedure.” From there Otter goes on a diatribe ending with the comment, “Isn’t this an indictment of our entire American society? Well, you can do what you want to us, but we are not going to sit here and listen to you bad-mouth the United States of America; gentlemen . . .” and with that the entire Delta fraternity gets up and walks out of the trial.

Wikipedia defines a point of parliamentary procedure as, “In parliamentary procedure, a point is when someone draws attention to a rules violation in a meeting of a deliberative assembly.” We got called on a rules violation last week in one of our meetings. Well, maybe it wasn’t really a “rules violation” per se, but rather a call for clarification. Indeed, a week ago we wrote:

I went back and studied my notes dating back to the 1960s and after ALL the rallies like we have seen since the November presidential election (the runaway rally that we called), most of the gains have been given back in a “selling stampede.” Not that we are predicting an end to the secular bull market, for we are not, but there is NO exception to the subsequent outcome. The only time stocks have not suffered such an outcome has been at the start of a huge up move. Obviously, we are not at the start of a huge up move. That said, pullbacks are for buying because we believe this secular bull market has at least another 10+ years left in it!

What we should have stated is that it is the final stage of a melt-up move that typically gets “given back.” In the current case that would be the August to last week “melt up.” If that happens it would mean the S&P 500 (SPX/2582.30) could fall back to 2425, which is where the final “melt up” stage began. That would be a full giveback, yet the SPX does have some support at the upside chart gap between 2560 – 2565 and then at 2525. If we do finally get a pullback, watch those key levels in order to determine if we are going to get a full downside correction. Also worth noting is that our short-term proprietary model was as “stretched to the upside” as it has ever been at the beginning of last week.

Speaking to last week’s action, it was the first down week in eight weeks and that weakness caused the SPX to break below its rising trendline, an ascending trendline that has contained declines since those August lows (Chart 1). Looking at some of our other indicators reveals our momentum indicator remains on a “marginal buy.” Our Advance/Decline Indicator (breadth) is at a neutral reading and our Investor Sentiment indicator is at its most extremely bullish reading in years (read: bearish). As our friend Jason Goepfert, of the must have SentimenTrader publication, writes:

Heading into [President Trump’s] year 2, stocks saw one of the best 1st-year gains after a presidential election since 1950. Year 2 [historically] was a tougher slog, with a barely positive risk/reward ratio during the year. Year 3 was just about perfect.

Moreover, our friends at the astute Bespoke Investment Group also note:

The scatter chart shows the performances of the DJIA for each President listed on their first and second year from Election Day or assuming office. What’s important to note about this chart is that while market performance following first year gains of less than 20% were pretty much evenly split between gains and losses, after years where the DJIA rallied more than 20%, performance was negative in the second year two-thirds of the time (Chart 2).