Rally Follow Up

In our view, the internals of Thursday’s rally were noteworthy: Nasdaq was up 3%, the largest percentage gain since July 7, 2003. Volume also rose 7%, to 1.97 billion shares, which was the first substantial gain on higher volume since January. Even more impressive, in our opinion: the advance/decline stats (2.78 : 1) and up/down volume (13 : 1) indicate a substantial amount of buying, following last Monday’s substantial amount of selling. That is indicative to us of a change in sentiment from extreme fear to a more Bullish levels.

The rally was followed by a low volume pullback Friday. This was not at all unexpected, and indeed, suggests a healthy bit of fear. Today’s follow through, while nice, may not be what is often called a Reversal Confirmation Day. It is widely ascribed to IBD publisher William O’Neill, who has tracked reversal rallies for over 30 years. In O’Neill’s opinion, a reversal that sticks will be followed by a confirmation day: a 1-2% increase in the major indexes on greater than average volume.

But here’s the rub: O’Neill states these confirmation rallies must occur on the 4th thru 10th day after the initial up session. I have no idea why this is, but it is hard to argue with O’Neill’s 30-year history of correlated statistical evidence. Days 4 thru 10 start Wednesday, March 31st and run to Thursday, April 8th.

To reconfirm our Bullish leanings, we will be watching several specific factors over the next few weeks:

1) Confirmation day mentioned above;

2) Internals, which have weakened during the sell off of the past 10 weeks. We want to see the internals re-assert themselves as the markets move back towards their January highs;

3) Resistance in the form of overhead supply; How resilient markets are as they approach these levels will provide insight into how renewed buyer’s appetites are for accumulating equities;

4) Market reaction to news is also worth watching. This includes both geopolitical news (i.e., terrorism), pre-announcements, and earnings releases;

5) Equity Fund Inflows were dramatically lower in March than January. It would bode well if these revved up again.

These factors should provide insight into how the market will behave as it approaches recent highs. We will be watching for divergences, and will keep investors abreast as things progress over the next four weeks.

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  1. Jonathan Appelbaum commented on Mar 30

    An interesting rally, but this looks suspiciously like a guess on the jobs report due on Friday. But that would prove O’Neill’s assertion. Friday’s report comes out and its positive then the market will rally again, which is 4 days after the initial rally. O’Neill’s assertion may be just the result of the investor psychology to anticipate positive news.

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