Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
We have some interesting things happening in our market indexes. After ralling sharply to start 2012, the S&P 500 was basing sideways for the past 9-10 sessions. The one headfake came Monday when it briefly broke the lows of last week, but instead of leading to more selling, that breakdown was greedily gobbled up by dip buyers – taking the index back to its 'basing' area. Today of course we have broken back over recent highs in the index and towards the target "everyone and their mother" sees in the 1340s/1350s area. (highs from last summer)
[click to enlarge any chart]
There was no such drama in the NASDAQ however. No glancing blow off the 20 day, no breaking of last week's lows – only teflon action.
That said, I'd like to point out how overbought we are on one secondary indicator – Relative Strength Index (RSI). While individual stocks can go far above 70 and stay there for a long while, rarely do indexes. Even under pre QE (market assumption of such) or QE conditions (I've outlined the QE2 era below for comparison). Are we in the "pre QE" era now? Maybe, maybe not. I think until today's data the answer was a definite yes. However we do have the LTRO era which coincided almost perfectly with the market bottom in December. So while not identical to QE, it seems to have changed market participants psychology in a very similar manner. And in the short run that is all that matters.
Right now it feels like the market cannot go down. Just like in periods last summer and a few years ago it felt like the market could not go up. I am highlighting that even during QE2 we had extremes when RSI went well over 70, and that led to 2 quick corrections. One of just under 3% and another of just under 5%. After that the market started a new leg up. So something to be aware of as we are now in the same condition.
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