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Will Turnaround Tuesday Stick?

Stocks rebounded Tuesday following Monday’s tariff-induced selloff.

The Dow Jones Industrial Average closed higher by more than 200 points, while the Nasdaq Composite gained more than 1% on the day.

But don’t break out the bubbly just yet. While the major averages finally bounced Tuesday, stocks faded from their highs into the afternoon session — and remain under pressure as trade war concerns linger.

Trade war gossip aside, it’s important to keep the market’s recent difficulties in perspective. The stock market just enjoyed the best four-month start to a year in more than 30 years, MarketWatch notes. A hard reset was in order, regardless of geopolitical risks. The fact that we’re staring down the barrel of the market’s worst start to May since 1970 shouldn’t shock anyone.

As the major averages threaten to open in the red today, we need to keep a close eye on the 2,800 area. This has become an important inflection point for stocks since the fourth-quarter meltdown and subsequent recovery. A strong bounce at these levels will probably lead to a bigger rally, while failure might trigger the next wave of selling.

SPX

Too squeamish to watch it all unfold? Log off and grab another cup of coffee. We could see a couple of false moves over the next few days as buyers and sellers battle for control.

Digging a little deeper, are we approaching the end of the line for the bull market as the averages abruptly retreats from all-time highs?

Or could the rally we’ve enjoyed in 2019 have a lot more staying power?

“Looking at all-time highs still only tells part of the story, our stat man Jonas Elmerraji explains. “A more telling statistic (especially following bear markets) is whether the market is at relative highs, such as 6-month highs. In other words, what percentage of the time are stocks pushing up, even if they’re not breaking new records.”

It turns out that since 1927, Jonas notes the S&P has spent 67% of its time within just 7.5% of 6-month highs.

So is the current rally becoming unsustainable? The chart below shows the S&P since 1960, with a red dot placed anywhere we’ve seen at least 100 days go by since making a 6-month high:

SP 500

Source: Seven Figure Publishing, Bloomberg

“Simply put, those red dots indicate when the market is failing to ‘work’,” Jonas continues. “We expect those dots to be scattered randomly on the chart – occasional corrections are healthy, after all.”

But these red dots have instead worked as accurate indicators of a market top. Leading into the top of the dot-com bubble and 2007 market peak, we saw extended stretches without any of these cool-off periods before a brutal bear market.

“That’s not what we’re seeing right now,” Jonas concludes. “Instead, you’ll notice a distribution of cool-off periods for the market that looks a lot more like how things looked in the early 1990s than in 2000 or 2008.”

Finally, not every new stock is circling in the drain this week.

Recent IPO Pinterest Inc. (NYSE:PINS) rallied almost 9% yesterday leading into tomorrow’s earnings announcement.

The stock might have a chance to beat expectations if we’re to believe recent reports claiming social media is making millennials emotionally and financially worse off.

It’s not exactly breaking news that social media is a double-edged sword. On the good side, you can keep in contact with friends and look at pictures of dogs. On the bad side, it encourages constant comparison to other people.

That failure to measure up leaves millennials emotionally drained, reports MarketWatch. In turn, this need is influencing younger generation’s spending habits. Millennials feel like they have to buy more to keep up with others online. Unsurprisingly, that’s having a negative impact on the generation’s finances.

But it’s probably good news for sites like Pinterest and Etsy Inc. (NASDAQ:ETSY). By preying on the insecurities of millennials, these new social media marketplaces stand to thrive — even if it hijacks the mental health of an entire generation.

Sincerely,

Greg Guenthner

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Greg Guenthner, CMT, is the editor of Rude Awakening PRO and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing for 13 years. In 2018, Greg’s Rude Awakening PRO portfolio beat the S&P 500 by 14%.

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