The huge drop in the US stock market on May 5th actually increases the odds that a strong rally will start soon, even if it won’t start a new bull market leg.
That’s according to Hayes Martin, president of the advisory firm Market Extremes. Over the years, I have reported on Martin’s predictions of market turning points, which have generally been impressive. (For the record: Martin does not have an investment newsletter; my newsletter tracking company does not audit his investment performance.)
It was only a week ago that I contacted Martin, who at the time said that a strong countertrend rally in the 8% to 15% range could start soon. I contacted him again midway through the trading session on May 5 to see if his projections had changed in the wake of the Dow Jones Industrial Average DJIA,
earning 932 points on May 4 and then giving them all back (and then some) the next day.
Martin said the net effect of the recent big swing is to increase his confidence that this rally from 8% to 15% could start soon. “We’re getting closer with today’s action,” he said.
One of the reasons for his increased optimism is what he calls “divergence bottoms,” by which he refers to times when the market as a whole is behaving stronger than it would appear if you were to focus solely on market averages. market. The lower divergences have a bullish meaning, just like their opposites, the upper divergences, when the market averages paint an unjustifiably bullish picture, are bearish.
Martin’s assessment that underlying divergences have strengthened in recent sessions is based on a number of indicators, and it is beyond the scope of this column to review them. But a good illustration of Thursday’s lower divergences comes from comparing the performance of the S&P 500 SPX,
(which is capitalization-weighted and therefore dominated by higher-value stocks) with the equal-weighted version (represented by Invesco’s equal-weighted S&P 500 RSP ETF,
In trading on Thursday, the equal-weighted version was outperforming the cap-weighted version by 0.6 percentage point.
Similar divergences were also evident in other parts of the market. The equal-weighted ETF version of the Nasdaq 100 QQEW Index,
was beating the weighted version QQQ,
by 0.4 percentage points, for example.
Martin reiterates the cautionary advice he gave a week ago: don’t get carried away when the market goes up. This is most likely a counter-trend rally within a bear market, not the start of a new bull market leg. Martin’s best guess is that the rally will “provide another selling opportunity” to reduce equity positions.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at firstname.lastname@example.org
Plus: Why did the Dow Jones plunge more than 1,000 points? Should I wait for the stock to go lower? This is what some professionals think.
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