Rally Faces a Challenge

The indices have enjoyed a nice move up from the mid-August lows. Starting around Aug. 13, we've seen healthy gains, most of which were disbelieved the whole way up.

The S&P 500 rallied from an intraday low of 1062 on Aug. 6 to an intraday high of 1129.78 on Monday -- a 6.5% gain. At its intraday high on Sept. 7, the Dow Jones Industrial Average had gained 580 points -- nearly 6% above its August lows. Until recently, the Nasdaq Composite was the laggard; but after playing catch-up, the index is now up 9.6% from its intraday low of 1751 on Aug. 13.

Now, with the market butting up against overhead resistance, it's challenge time: We are now at key resistance. The sledding gets much more difficult from this point forward.

At this stage of the move off of the lows, I have become cautious about getting aggressively long. I suspect there will be better entry points over the next few weeks, perhaps even fresh lows in October. Core positions can be hedged via covered calls or the outright trimming of names that have had good runs.

Watching the Moving Averages

The SPX and the Dow are comfortably above their respective 50- and 200-day moving averages. Last week, the Nasdaq finally broke through its 50-day moving average -- but remains far below its 200-day at about 1970. Based upon its position relative to the 200-day, we can describe the Comp as having lagged behind its more conservative brethren, the S&P 500 and Dow Industrials.

It is worth noting, however, that the Nazz stocks are not quite bumping into the same levels of resistance as the SPX and Dow. With greater momentum and sellers less immediately nearby, it is quite possible that the over-the-counter stocks will develop a short-term top sometime after the S&P and Dow. My off-the-cuff guess is 10 days to two weeks after.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].