Who Do You Trust?

by Jeffrey Saut of Raymond James, 2/12/19

Who Do You Trust? was an American television game show, originally hosted by comedian Johnny Carson, which aired from 1957 to 1963. The series was initially emceed by Carson and announced by Bill Nimmo. A year into the run, Nimmo was replaced by Ed McMahon. Carson and McMahon departed in 1962 when Carson was hired to take over from Jack Paar on NBC’s Tonight Show. Three married couples competed on each show; the announcer would introduce couples one at a time, and Carson spent more time interviewing the contestants than quizzing them. In the quiz portion, Carson would tell the male contestant the category of the upcoming question; the contestant would then have to decide whether to answer the question himself or "trust" the female contestant.

We revisit this “Who do you trust” meme this morning because of what I have been saying the past few weeks. After identifying the selling climax low of December 24, when 48.5% of stocks made new lows, I recorded two 90% upside days (90% of volume and upticks came on the upside). The first one occurred on December 26 and the second on January 3. When such a sequence happens within a two-week period from a selling climax low, it is almost always suggestive that the lows are “in.” That is why I have been adamant since January 4 that the December lows (SPX @ 2346) would not be retested like so many pundits were expecting. I have also opined that my work showed that the equity markets should trade higher into the mid-February “energy peak.” However, recently I have stated that, due to the extreme near-term overbought condition of the stock market, I do not “trust” the rally. Indeed, who do you trust?

Last week’s late decline came as the S&P 500 (SPX/2707.88) tagged its 200-day moving average (DMA), which now resides at 2742.63. Likewise, the Advance – Decline has peaked and has pulled back (chart 1, page 2). The rally by the SPX off of the December lows encompassed ~16.7% in one of the best “straight up” moves seen in a long time. So far, no damage has been done to the short-term uptrend from the Christmas Eve lows. That said, there were some noticeable divergences with the Industrials, Technology, Staples, and Utilities rallying while Financials, Energy, and Materials fell. That action caused our pal, Leon Tuey, to write:

"A short-term correction has commenced and will likely last 2 - 4 weeks which will prove to be rotational/time in nature and not of magnitude. The consolidation/correction will be global as all daily indicators are registering grossly overbought readings and short-term sentiment backdrop has deteriorated (a sharp rise in bullish sentiment). Moreover, even a few of the weekly indicators are registering overbought readings. After a brief correction, the market will rally to new highs, but the weekly oscillators will unlikely exceed their recent highs. . . . It's not the end of the world as the secular bull market which began on October 10, 2008, remains intact. As mentioned, the second leg of the bull market which commenced in February, 2016, is the longest and strongest as it is driven by improving economic conditions as a result of monetary easing. Since the first leg lasted nearly seven years, the current leg is still early and still has some ways to go in terms of time and distance. Hence, when the short-term overbought condition is rectified, re-deploy cash."