Wednesday, April 24, 2013

We're Not Out of the Woods Yet

Since its peak on April 11, the S&P 500 declined by -3.2% through April 18 and has since rallied +2.5% off that low. Good sign? Are we on our way to a new high?

Frankly it's too early to tell. The chart below helps to explain why.

Source: Bloomberg

In the past, when the S&P 500 has made new highs (green boxes) and then corrected off those highs, any ensuing rally thereafter eventually rolled over (red arrows) with further declines to follow. 

That's not to say it will happen this time, and of course there have been times when the market has corrected off new highs only to later rally to another new high. My point is we're currently at a key point where the market can go either way: this rally fails like those in the past (red arrows), or presses higher and breaks through the former April 11 high. As I've written here, I remain bearish, expecting this current rally to roll over, however if the S&P 500 were to successfully break through its prior high, my tune will likely change.

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