Is This Time Really Different?

Dare to be Different‘This time is different’ was a common theme during the late 1990 tech bubble. The theme even made its way into MBA programs across the nation. Ultimately, the share prices of companies with massively elevated valuations, no earnings and poor business plans came crashing back to earth proving giddy bulls wrong.

This week, we are once again faced with the question, is this time different or is what has been true in the recent past still true today?

Weak Euro, Strong Dollar

In recent years there has been a significant correlation between stock prices and the dollar/Euro.  On days where $UUP was up, stock prices were generally lower. Likewise, on days when the Euro ($FXE) was down, stock prices were down.

Today, however, we have $FXE breaking lower, the dollar $UUP heading higher (maintaining their inverse correlation) yet stock prices are also up. In other words, a strong dollar/weak Euro has almost always led to weaker stocks, yet here we have stock prices bucking the trend.

Sentiment

Generally speaking, when there are too many bulls, prices decline. This has been very true over the course of 2011 when the market was not trending, but rather ranging. The exception to this rule is when the market is trending. Sentiment can remain at bullish levels for extended periods of time as prices trend higher.

Today, we have sentiment at extremes, yet the market is not trending and in fact, is up against resistance ($SPY$128ish).

Strong Stocks

While we have two basic contradictions to the norm (stocks bucking the Eur/Dol and sentiment), the question of whether this time is different is very real here. Our scans turn up a plethora of bullish stocks, which have either already broken out or which are threatening to break out.  In fact, generally, when we find these types of bullish set ups in such abundance, it’s a strong tell that the market has buying power below it and is ready to rise.

Nevertheless, there are at least two major hurdles that first must be overcome before we can truly say this time is different.

Treasuries at Support

Treasuries, as measured by $TLT are trading at their 50-day average. While the chart looks toppy here, the 50-day average is a significant level of support and stocks are still negatively correlated with $TLT. In other words, if $TLT rises here, it’s still reasonable to assume stock prices will decline.

Stocks are Overbought

As with sentiment where sentiment can remain overly bullish during rising markets, in rising markets, stocks can remain overbought for extended periods of time. Once again though, stocks are not yet trending and $SPY is overbought.

Probabilities Favor a Stock Sell Off

So let’s review, we have stocks bucking the trend against two major currencies, stocks are overbought, sentiment is too bullish, stocks are at resistance and treasuries are at support. In this situation, probabilities strongly favor a failure at $SPY resistance here.

That said, the strong number of bullish charts out there indicates buyers are willing to take on more risk. If they are resolved to do so for whatever reason, this time may in fact be different.  All I know is that when I see this many bullish charts, it’s usually a pretty strong tell that prices are going higher.

It may all come down to today’s employment report and how the market decides to interpret it.

But let’s be clear, if you are betting on a $SPY breakout here, you are betting against the odds.  It may be a smart bet to do so this time, I don’t know, but it is what it is.

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