Consolidation or Rally’s End ?

The future is, by definition, unknown and unknowable. This is one of the factors investors must constantly wrestle with.

Forcastors are folly, predictions are unreliable. There is an old yiddish expression Mann traoch, Gott Lauch — which translates as “Man plans, God laughs.”

History may not repeat itself, but it often rhymes. When dealing with unknowns, we attempt to find as many parallels, as much evidence, the cleanest data we can, to make the most informed investment decisions. Outside of the house, the persons with the best odds in the casino are the card counters.

Which brings us to today’s market action. Is it the start of a consolidation, or is it the end of the rally?

The honest answer is we do not know yet. There is some evidence that after a long run upwards, the market needs to consolidate, to catch its breath, to build up the supply of cash to drive prices higher. Consider the 1974-75 rebound rally (75%), which followed the brutal 1973 year selloff (45%). There was a significant consolidation period that lasted from the end of 1974 to the middle of 1975. Are we entering a similar period?

Perhaps. But there is also data that suggests the rally is running out of energy. Strength has become selective, the Advance/Decline line is weakening; Narrowing rally breadth can often lead to a correction. Since January 4th, the bulls have been unable to produce a convincing rally. There are higher levels of churn. The percentage of stocks above their moving averages are deteriorating. Sentiment, as measured by the put/call ratio, investor surveys, has become complacent.

And the noise from various Fed governors tell us that the massive accommodation of ZIRP will not be with us forever.

However, while each camp can produce plenty of evidence supporting their views, I am unable to say either side is convincing. There simply is not enough data to make the call that the run which began in early March is over — at least not yet.

As of right now, the jury is still out . . . I expect we know a little more by the end of today.

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