About a week ago, we briefly discussed the state of the stock market and concluded that there was a high probability of a rally within 4 weeks. Well, yesterday we saw one of the strongest rallies seen in years, with the S&P 500 surging 2.86%.
So what should we expect now? We think that the rally was broad enough to be sustainable for a few weeks, however, the surge has resulted in short-term overbought conditions and this should lead to either a retracement or consolidation, which could last for a few days. As of yesterday’s close, 91% of S&P 500 stocks were trading above their 5-day moving average. This percentage is way above its recent average of around 48%, and as a result, we can expect a short-term retracement or consolidation while mean reversion takes place.