The July-August stock market rally has caught many surprised given its strength and duration; however, we are of the opinion that this "freight train" is running of out of fuel, and shall falter from roughly current levels in what may be quite a "quick and nasty" setback at a minimum. It very well may take on a more decidedly bear market decline, but it is far too early for us to determine this.
Quite simply, if we look at the broad-based Wilshire 500 Index, we find the rally off the March low is substantial, but only insofar as a mean reversion exercise towards the 70-week moving average currently at 10,492. Looking back in time, we find that on a closing basis, the Wilshire tends to confirm bull markets once it breaks out above this moving average, and bear markets when this major resistance level proves itself with lower prices. We have just such a fulrcum point roughly 1.5% above current levels.
Our thoughts are simple: we expet thje 70-week moving average to provide resistance to this rally; and for prices to correct rather sharply. However, it shall be the character of that decline that will speak volumes - we hope of course - as to whether a major test of the March lows is in store. From a fundamental perspective - we believe that to be the case; but we have no solid technical evidence to support our supposition. Therefore, we are willing short sellers at current to slightly higher prices, and our stop loss will be two weekly closes above this moving average as we would want to give this position wide lattitude to work given the potential for a major inflection point and the volatiltiy that surrounds them.
In other words: "if they a yell'in; then you should be sell'in"; and traders do seem to be doin so.
