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Sucker Rally?

by May 19, 2023
May 19, 2023
Sucker Rally?

Considering our bearish outlook, this week’s rally has been hard to watch; however, the configuration of the Silver Cross Index* (SCI) continues to show how this rally may ultimately fail. On the chart below we can see in 2022 the market fell off the all-time price high initiating a bear market. Note the SCI double top negative divergence. In March 2022 the market rallied strongly, but the SCI showed insufficient participation and the rally failed.

This week, we have SPY making new rally highs, while participation has been dropping off the recent SCI lower top. Over the years I have learned that the market will do pretty much what it damn well pleases, but this setup, virtually identical to 2021/22, is just impossible for us to ignore. We have the SCI double top, followed by a lower SCI top, which is a strong negative divergence to the price advance.

Conclusion: The market is being carried higher by the mega-cap tech stocks. We don’t believe this situation can be sustained, and that the rally will fail.

(*) The Silver Cross Index (SCI) shows the percentage of stocks in the index with the 20-day EMA above the 50-day EMA, an intermediate-term BUY Signal.

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