The rally we saw in the stock market after Friday morning’s employment report was a very good one on several levels. It came on a big jump in volume (over 7bn shares on the composite volume) and very good breadth (10 to 1 positive on the S&P 500 index and more than 8 to 1 positive for the NYSE Composite index). It was also a broad rally...as both the Russell 2000 index and the S&P 500 equal weight index outperformed (with both rising more than 3%).
Although the economy is bouncing back strongly, we still worry that the stock market has already priced-in most of the likely growth we’ll see in the economy. However, as repeated over the weekend, we have to focus on what is going to happen in the market place...rather than what should happen based on the fundamental backdrop of the economy at any given time. The breakout above the 3,000 level and 200 DMA has been a significant one, so there’s no question that this is bullish for the stock market.
If there is anything to be concerned about on a short-term basis, it would be that the U.S. stock market (AND many other markets around the globe) are becoming quite overbought...at least on a very-short-term basis. Yes, the futures are rising nicely again this morning, but the RSI charts on the S&P 500...and even the Russell 2000...are starting to become extended. We’d also note that the put/call ratio stands at the very, very low level of just 0.41. Therefore, it could/should be tougher for the stock market to rally in a significant way over the very-short-term.
The one area that will be very interesting is the Nasdaq. It has also become quite overbought on its RSI chart...just at it is testing its all-time highs from February. (In fact, the NDX Nasdaq 100 briefly touched a new record level on an intraday basis last week.) Therefore, this area of the market is facing a possible “double-top.” Back in both 2000 and 2007, the stock market saw “double-tops” each time (in those cases, it was the S&P 500 index)...and then rolled over in a powerful way. So if the same thing happens to the Nasdaq this time around, it will not be good at all......HOWEVER, we’d also note that the Nasdaq just experienced a “golden cross”...with a rising 50 DMA breaking above a rising 200 DMA. That certainly should be a positive development, but as we all know, “golden crosses” can sometimes take place just before the market rolls-over.
What we’re trying to say is that the action in the Nasdaq over the next few weeks is going to be quite important. Even though a lot of people believe that the value stocks will outperform the growth stocks going forward, that does NOT mean that the growth stocks in the Nasdaq are going to decline. So even if the Nasdaq underperforms, it STILL NEEDS to rise if the rest of the market is going to rally. Therefore, we’ll be watching both the Nasdaq & NDX indexes very closely. If they roll-over in a substantial way...and signal that they’ve made a major “double-top”...it’s going to change the outlook for the rest of the market. (The outperformance of the value stocks won’t help much if they outperform on the way day.)
Speaking over overbought markets, the Aussi dollar is becoming very overbought according to its RSI chart. In fact, you have to go back to very early 2018 to find a time when it was more overbought. (And it only got slightly more overbought than it is now for a very short time-frame...before it rolled-over in a significant way.) Remember, the Aussi dollar is important for the direction of risk assets due to the “carry trade.” If this currency rolls over...even if it’s only for technical reasons...it should cause create a headwind for stocks (and many other risk assets). Any pull-back in the Aussi dollar might only be a short-lived “breather,” but this is another item we’ll be watching very closely over the coming days and weeks...to help us determine whether this incredible rally off the March lows has a lot more upside follow-through left in it. In fact, it will almost certainly be a more important indicator than the Nasdaq.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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