2 Things Wrong With Wednesday’s Rally

There’s no denying the move offered nervous investors some much-needed relief. But, before any long-termers celebrate the second day of gains that seemingly put the market back into a bullish mode, it would be wise to note two gaping flaws in the effort. Both could derail the budding uptrend before it has a chance to achieve escape velocity.

First, for U.S. markets anyway, there were more decliners than advancers, and there was more up volume than down volume.

That doesn’t seem possible given the gain, but it’s possible. The key indices were able to end the day higher because enough of the biggest names mustered forward progress, but the slight majority of all the other names actually lost ground. It’s a concern simply because all those other names can weigh a rally down. Participation from all segments is critical for a long-lived rally.

The other big worry coming out of Wednesday’s gain is the fact that utilities stocks were the big winner, while materials names lost ground.

It may seem irrelevant on the surface, but think philosophically on the matter. It was anything but a rush back into risky, growth-oriented names that tend to thrive when the economy is firing on all cylinders. Rather, it was a flight to safety. Investors were rushing into the place they know they can rely on when all other areas are in jeopardy.

Chatter that a rate cut may be in the works certainly helped the dividend-oriented utility names. But, think about that as well. While simulative, the Fed cuts rates not because things are going well, but because things are going poorly.

It may be nothing. One day does not make or break a trend. In fact, there are several clues that say the modest 7% tumble from the late-May highs was rapid enough to set up the rebound move already… a move that would normally take several weeks and more losses to set up. Specifically, the put/call ratio trend has been oddly high of late (except for Tuesday), and the Arms Index or TRIN reading for the NYSE also suggests the balance between volume and the advancer/decliner ratio has worked its way to a point where the bearishness isn’t sustainable. In other words, the selling has run its course, running out of fuel and fodder. It’s just odd to see that happen so quickly.

Odd or not, those are the hints that have already taken shape.

Only time will provide answers, though it would be surprising to not see some bears dig in and some profit-taking take shape. More than a few traders regret not bailing out a couple of weeks ago, and with a second chance on the table, they’ll likely pull that trigger. How far such an effort goes remains to be seen.

The smart-money move in the meantime may be to do nothing and let the buyers and the sellers grapple for scraps. Once one side or the other gives in, that’s when we can make a move into what will likely be a much better and much more trade-worthy trend.