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Don't Trust the Stock Market Rebound

By Jeff Clark
Tuesday, November 4, 2014

The stock market rebound continued last week.
The S&P 500 has now recovered everything it lost during the first two weeks of October. And it is back to trading at all-time highs.
But I'm still skeptical the market correction is over...
Take a look at this chart of the S&P 500...
The S&P rallied to a new all-time high on Friday. It has plowed through every resistance level.
If you had offered me 20-to-1 odds of this happening two weeks ago, I wouldn't have taken the bet. A "V" bottom like this is the Loch Ness Monster of the stock market. Urban legends say it exists. But most folks have never seen one. Yet, it's what we're seeing today.
We are entering a seasonally strong time of the year for stock prices. So stocks could continue even higher from here.
But as I wrote last week, corrections usually unfold in either three- or five-legged patterns. The "V" pattern only has two legs: one down and one up. We need one more leg down to complete the correction.
And then there's the NYSE McClellan Oscillator (the "NYMO")...
The NYMO is a measure of overbought and oversold conditions. Readings below -60 point to oversold conditions and often mark the end of a downtrend in the market. Readings above 60 signal overbought conditions and mark the end of a rally.
Notice how the NYMO moved consistently between overbought and oversold readings for most of the past two years. But look at the cluster of oversold readings we got earlier this month – in the midst of the market correction. It's that cluster that kept me from selling stocks short into the decline. Instead, I was looking to buy stocks.
Now... look at the cluster of overbought readings that just occurred. This is what is keeping me from wanting to buy stocks at the moment. Aggressive traders can even use this cluster as a reason to take a modest short position as the market backs off from its overbought conditions.
In short, I don't trust the stock market right here. It looks vulnerable to another leg lower. Once we get that move out of the way and start seeing some oversold conditions, we can start looking at the possibility of a year-end rally.
Until then... it's best to stay cautious.
Best regards and good trading,
Jeff Clark

Further Reading:

Find more of Jeff's recent research here:
If You're Tired of Volatility, Take a Look at This Market
"The U.S. stock market isn't stable right now… So where should investors look for stability today?"
How to Trade Today's Fast-Changing Market
"If you want to be a successful trader in today's market, pay attention to these indicators and be ready to change course fast…"
Here's What to Do With Your "Trade of the Year" Profits
"It's time to take profits on coffee... and put them in the next commodity set to rally..."

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Market Notes
Airline stocks soar... Southwest, Delta, and American Airlines all rally 45%-plus in 2014.
Corn is staring an uptrend... prices are up more than 15% over the past month.
Brazilian stocks fall fast… country fund EWZ drops more than 20% over the past two months.
"Big Cheap Tech" continues its long-term uptrend... Apple, Intel, and Microsoft are up 50%-plus over the past 15 months.
Market Watch
Symbol Price
S&P 500 2022.17 +0.2% +14.8%
Oil (USO) 30.46 -0.6% -10.8%
Gold (GLD) 112.33 -0.3% -11.5%
Silver (SLV) 15.47 -0.2% -26.6%
U.S. Dollar 87.36 +0.5% +8.2%
Euro 1.25 -0.2% -7.3%
Volatility (^VIX) 14.38 +2.5% +8.3%
Gold Stocks (^HUI) 158.80 +1.7% -30.1%
10-Year Yield 2.36 +2.2% -9.9%

From The Crux
World ETFs
Symbol Price
India (IFN) 27.69 -0.2% +38.2%
USA (SPY) 202.33 +0.3% +17.1%
Taiwan (EWT) 15.70 -0.1% +11.0%
Israel (ISL) 16.91 +0.6% +10.2%
China (FXI) 39.54 -1.0% +6.5%
S. Africa (EZA) 69.01 +0.9% +9.2%
Canada (EWC) 29.65 -0.9% +3.5%
Japan (EWJ) 12.17 +0.9% +4.8%
Singapore (EWS) 13.30 +0.2% -0.3%
Lat.America (ILF) 36.07 -1.8% -6.5%
S. Korea (EWY) 57.74 -1.5% -9.0%
Russia (TRF) 12.00 -0.2% -19.8%

Sector ETFs
Symbol Price
Biotech (PBE) 49.63 -0.5% +40.4%
Semis (PSI) 23.29 +0.9% +32.8%
Health Care (IYH) 141.83 +0.0% +28.8%
Transportation (IYT) 157.00 +0.2% +25.7%
Big Tech (QQQ) 101.80 +0.4% +24.8%
Utilities (XLU) 45.83 +0.8% +21.7%
Defense (PPA) 33.69 +0.2% +17.9%
Real Estate (IYR) 75.49 +0.7% +17.8%
Financials (IYF) 87.51 +0.5% +16.8%
Industrials (IYJ) 104.87 +0.1% +12.0%
Consumer Svcs (IYC) 127.97 +0.3% +11.4%
Software (PSJ) 37.60 +0.4% +12.2%
Insurance (IAK) 48.73 +0.1% +11.5%
Basic Mat (IYM) 84.03 +0.2% +10.7%
Telecom (IYZ) 30.48 +0.0% +7.4%
Water (PHO) 25.91 +0.3% +5.4%
Media (PBS) 24.96 +0.0% +3.6%
Construction (PKB) 21.65 +0.4% +3.6%
Retail (PMR) 34.78 +0.5% +0.8%
Alt. Energy (PBW) 6.13 +1.5% -3.3%