By Mark DeCambre, MarketWatch
Where is this dazzling bull market headed in the coming days and weeks?
That is the trillion-dollar question some nervous strategists, analysts and traders are wrestling with, following a relatively brisk rally for equities to kick off 2020.
So far, major indexes have checked all the boxes for the bulls. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.44% traversed a milestone at 29,000, the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.38% followed with its own landmark turn above 3,300 and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.67% is rallying like it is 1999. And that’s all within the first 11 trading days of 2020, in which the Nasdaq (and the S&P 500) have closed at all-time highs more than half the time.
Another way to think about, the ferocity by which stocks have climbed in the first three weeks of this year, S&P 500 gains have already exceeded the 2020 estimates for nearly half the 18 analysts surveyed by MarketWatch.
Part of the euphoria has been stoked by the apparent détente between China and the U.S., cemented by the signing on Wednesday of the first stage of a trade resolution between Beijing and Washington. The other factor keeping equities afloat is undoubtedly a Federal Reserve that slashed interest rates thrice last year to a 1.75%-2% range and have markets under the impression that a low-rate regime is here to stay to for the foreseeable future.
“We stay irrationally bullish until peak positioning & peak liquidity incite [a] spike in bond yields & 4-8% equity correction,” wrote analysts at Banc of America Securities on Friday in a weekly research report on the state of the market.
However, even bulls know that stock markets don’t rally indefinitely.
“To date the market has had a long run of prosperity that makes investors nervous, because we all have good memories that what goes up must come down,” Art Hogan, chief market strategist at National Securities Corporation, told MarketWatch.
And for some there is plenty of reason to believe that this year could be one replete with volatility shocks along the way?
For one, some 87% of the components of the S&P 500 are trading above their 200-day moving average, used by technical analysts to help gauge bullish and bearish long-term momentum in an asset (see chart below):
“That is the highest mark since July, 2014. And July 3, 2014 was the last time there were 90%. That lasted for a day,” Frank Cappelleri, executive director of equity sales and trading at Instinet, told MarketWatch on Friday.
Meanwhile, a measure of how intensely the market has been bought is showing the highest reading since January of 2018. The relative strength index, or RSI, over a rolling 14-day period was at 76.91 on Friday and had touched 78.27 on Dec. 27, marking the highest reading since Jan. 26, 2018 (see chart attached). Traditionally, the RSI, which charts the speed of price changes in an asset, oscillates between 0 and 100 and is considered overbought when it reads above 70 and oversold when below 30: