With many market commentators becoming increasing bullish as the market continues its move higher, trading expert Richard Rhodes cautions, "The tectonic plates beneath the market are shaking."
Th editor of The Rhodes Report explains, "Each day, we watch the current rally powering higher; and, each day we find our indicators becoming more and more overbought. While we are concerned about the overbought conditions, we are most concerned by the 'mini-mania' that has gripped stocks and the fact that this sharp rally is as narrow a rally as we have seen in many years."
He notes that the percentage of stocks above their 10-day and 200-day moving averages are now less than what they were at the February peak. He explains, "When the broader market rallies – then we want all the generals and troops moving together on a united front – and clearly this isn't the case.
And while noting that this is "worrisome," he also recognizes that it is foolhardy to attempt and call a short term top. He says, "We continue to believe that from a fundamental perspective that the probability of a bear market is higher than many anticipate at this time – however, the technicals don't yet support this." He quips, "It will end when it ends and not a day sooner."
Meanwhile, he adds, "Our friends a Birinyi & Associates have brought to our attention that over the course of the past 30 trading sessions, the S&P 500 has gained over +7% from its March 14th low. Since 1962, this type of rally has occurred 95 times, and the results looking 1-month, 3- months and 6-months out show net losses are to be expected in each time frame."
Rhodes continues, "This fits in rather nicely with our 'narrow rally' thesis, and it simply means the time to become more aggressive on the short side is directly in front of us." Meanwhile, despite his growing concerns, as a trader he remains long in order to take advantage of the current upsicde moment.
In his trading portfolios he has take a long position in Progressive (NYSE: PGR), which he notes recently broke out of a bullish wedge pattern. He says, "The stock has a bullish consolidation developing just below 200-day moving average resistance. We sense a larger breakout looming."
He also recommends Verizon (NYSE: VZ), noting that "the bullish wedge is rather clear, with prices breaking out higher." He says to expect further gains ahead.
A third long recommendation is Genentech (NYSE: DNA). He notes, "A very large consolidation pattern has formed, and the stock's recent spike higher and bullish patterns are suggestive of a larger move higher."
Again, I would emphasize the trading nature of these idea. He says, "We are tentative buyers here and we intend on keeping the stops rather 'tight'. Be prepared, for a decline could very well be swift."
For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.
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