Dead Cat Bounce For Stocks? Strong Market Breadth Says No

The two-day rally in stock markets has been impressive. Further, market breadth has been so strong during the rally that it’s difficult to categorize this as a “Dead Cat Bounce”.

At the time of this writing, market breadth was running positive about 8/1 while volume is flowing in at around a 9/1 pace into UP vs DOWN stocks.

That said, prices are starting to get stretched. After passing 2040-5 there isn’t much resistance until until 2075-7 tomorrow on S&P 500 September futures.

A couple of things to note of importance.  The S&P 500 Index and Dow Jones Industrial Average are trading back above their June lows (positive). This eliminates the potential of a bearish impulsive wave pattern from an Elliott perspective.  These are both positives to go along with the strong market breadth. It seems that this BREXIT pullback is stabilizing.

Although we still can’t completely rule out a strong retest of the lows (or move to new lows), the market is shaping up nicely to buy deep pullbacks. Any weakness into early July would likely be bullish as momentum and market breadth have been sufficiently positive in the last couple days – this means that any pullback would come with positive market divergences.

There is one important negative to point out in this recent move higher for equities. It has been mentioned before, but Treasury yields are hardly showing any rally off the lows. And most of my indicators line up to show another 3-5 days of weakness before these bottom out.

Overall, I think hedging into this strength is smart. That said, I would not add to shorts at this point given the S&P 500 Index has already rallied past the 2040-5 area. See charts of the S&P 500 Index and VIX below (from intraday today).

Incredibly enough, VIX has wiped out ALL of its pre-BREXIT gains and back down to the lowest since early June-  Still a bit early to buy VOL but at end of day or early tomorrow some opportunities could emerge.

Thanks for reading.

Twitter:  @MarkNewtonCMT

The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.