Hey Market Pilot,
Ever since the S&P 500 (SPY) crossed over its daily 50 simple moving average (SMA) on its last run-up which started a few weeks ago, I had been saying that price would eventually test that daily 50 SMA. It took some time, but the move finally happened last week. However, instead of it being a pullback to support an uptrend, it looked more like a bull run that was stopped in its tracks.
There was definitive destruction last week. Something changed. Things broke. Where price would normally be expected to hold or bounce, price instead fell hard. Investors and funds were hitting the eject button. By one measure, if we take a look at the major indexes, there are 692 stocks hitting 52-week new lows, and only 39 stocks hitting 52-week new highs.
This is incredibly bad considering the major indexes were at all-time highs. As I wrote in my last newsletter, there seem to be two major reasons for this: inflation and Omicron. I felt that Omicron may end up not being too big of a deal, but inflation (and the coming rate hikes) are probably more to blame. There is probably some “taper tantrum” in there, too, since the Federal Open Market Committee (Fed) will be reducing the amount of money injected into the economy.
We have all been looking for the Santa Clause Rally, but there could be bigger forces at play that may derail the run up. Or, the Santa Rally could be a giant bounce in a new downtrend. Either way, I wouldn’t be too confident that today’s rally is indicative of the true health of the market.
-Your Profit Pilot, TG