Is This Rally a Charade?

Given the recent rally in the markets -- in most cases an unprecedented 40% gain from the March lows -- it really is a surprise that we haven't seen a deep pullback. What gives? Is there underlying strength and support for this market, a "real" bottom that gives investors the confidence to hold stocks long term? Or is this a charade and is the real end nigh? As usual, the answer probably lies somewhere in the middle.

Nasdaq Has Led the Way

The true leader has been the Nasdaq, no question about it. This index always displays the qualities of a bull run before the others, and for good reason. The risk appetite of Nasdaq stocks bleeds into small-caps, and then large-caps follow. We've seen many a rally in the past led by the tech-heavy Nasdaq. See the chart below; this could be no different. However, pay particular attention to the relative strength, which peaked recently yet did not confirm with a higher price (negative divergence). Otherwise, volume has been robust on the positive days (green bars above).

NASDAQ bigtrends.com

S&P 500 Isn't Far Behind

As stated above, the S&P 500 has been a solid performer. It just hasn't been as good as Nasdaq. What's interesting is the rotation in the SPX. One day it's financial, the next day it's commodities and a weak dollar, the next day it's tech, and then it's pharma. So long as the money is not going to cash or bonds, right? See the chart below, and notice the flattening trend, but with much support by moving averages. So far so good. A break above the 950 level may cause the bears to rumble and perhaps even cover positions quickly.

S&P 500 (SPX) bigtrends.com

An Options Play

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