Does November 2004 Equal March 2003?

Since this rally began in late October, it has been quantitatively different than the prior failed moves of 2004.

In many ways, this move parallels the run that began just before the Iraq War started in March 2003. In both instances, the rallies were preceded by a series of false breakouts. In the first half of 2004 alone, there were three failed rallies. In the three years prior to the move off the 2003 lows, there were four moves that fizzled, each making lower lows.

Three Swings Lower Before March 2003 the market made a series of lower lows.

Source: Maxim Group

The moves off the August 2004 bottom and March 2003 low were the first rallies in the respective strings to have made higher highs and higher lows in each series. In both cases, the 50- and 200-day moving averages were penetrated to the upside, a notable improvement over prior moves. And in both instances, the advance-decline line moved up smartly. That powerful "breadth thrust" created momentum that persisted much longer than most observers expected, and each rally established a significant trend line that subsequently proved difficult -- but not impossible -- to crack.

2004's Swings Note the first selloff that didn't register a lower low.

Source: Maxim Group

This leads us to the move at hand. Prior to Tuesday's selloff, we were not particularly overbought -- at least based upon the McClellan oscillators. That suggests only an ongoing consolidation, consisting of backing and filling, with shallow pullbacks before the next major leg up.

CGF's technical analyst Guy Ortmann notes that yesterday's sharp move down has the NYSE McClellan overbought/oversold indicator reading at a negative 146 -- a high oversold reading. The McClellan for the Nasdaq is at negative 83 -- oversold, but not nearly as deeply as the NYSE.

What Could Go Wrong?

The only real red flag I see has been sentiment, which has been registering too giddy for a while now. In fact, the Investors' Intelligence poll today shows that bullish sentiment is up once again. This is significant because investors tend to describe themselves as bullish only after they deploy their capital -- not before. When there are too many bulls, it suggests a fully invested group of investors. Although we are not quite there yet, if you want an indicator to fret about, this would absolutely be the one.

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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].