On Friday, the S&P500 closed at its high of the day for the second consecutive day. This two-day streak is relatively rare and has happened only fifteen times in the past twenty years (see table below).
We are not certain what it means except it does seem, at least to us, to indicate market strength. Tape painting? Could be, but doubt it. Markets gummed up with monetary stimulus? Probably explains quite a bit.
It does feels, however, there is a structural short in the market and/or lack of real sellers, which are providing a seemingly irrational bid to stocks given the global slowdown that will almost certainly hit earnings.
China’s announcement on Friday of new stimulus projects did complete a trifecta of policy responses the bulls were looking for: 1) ECB’s OMT; 2) Fed’s QE3 (almost certain); and 3) China stimulus. It may or may not be enough to turn the global economic fundamentals, but it does appear to have turned market perceptions for now and caught many leaning the wrong the way. Think animal spirits!
We wouldn’t sell it quite yet as the table below shows the S&P500 has on average continued to run after back-to-back closes at the daily high. In fact, it will be interesting today to see if the index can maintain its run of positive 1-day returns, which the table shows averages 0.9 percent and has closed up the next day in all fifteen cases.
We’re nervous, as there is a lot out there to make one nervous, but we will let the market tell us when its time to head for the hills.
(click here if charts are not observable)