Last Friday, when stocks were selling off after the bad jobs report, I told a fellow trader, ‘the most bearish thing that could happen right now would be for stocks to bottom and rally right here.’ As CNBC fondly reports, the Dow hit another new high today. And I still feel that this rally of the past couple days was the most bearish possible outcome.
The most bullish possible outcome would have been for stocks to fall 5-10% over a few weeks time. This would have gradually worked off the overbought conditions and allowed for a base to be built for higher prices.
This quick rally, on the other hand, makes me worry about the overall level of enthusiasm for stocks. There are just too many buyers out there too eager to buy any kind of dip in prices. And these kind of buyers are much more likely to be the last buyers of a trend rather than the early ones.
The continued narrowing of this rally is also a glaring red flag. While the Dow rose today, small caps, homebuilders and transports, aka the leaders of this bull market, all declined. Fewer and fewer stocks are pushing the indexes higher right now. There are lots of tired stocks in this market and because they haven’t been allowed to rest we could see an air pocket type of selloff.