Wild Wednesday – GDP, ADP, EIA, PMI, FOMC and Ag Pricing – Oh My!

I wish we weren't but the odds favor the bears as we flatline after a 5% run for the month of July.  The 5% Rule isn't complicated – we expect a 20% pullback of the run (1%) and we kind of have it on the RUT and the NYSE but, so far, the other indexes are in denial.

In the bigger picture, we ran up from 1,350 on the S&P in November to 1,700 (just shy) last week and that's 25% and again, a 20% overshoot is predictable in our 5% rule so we expect a pullback to 120% of 1,350 to 1,620.  We did get that already from the initial run to 1,687 in May so we could call that the correction we needed and, if so, then this is not exhaustion but healthy consolidation for a breakout.

Just in case it doesn't though, we're leaning a bit bearish but, over 1,700 – call us bulls!  As you can see from Doug Short's SPY chart, the volume sure doesn't look like what you expect if we're going to break higher and it's downright scary to be bullish when your 200 dma is 10% below your index.  Now, a sudden pop over 1,700 isn't going to raise the  200 dma, is it?  So, how much higher than the 200 dma do you think the index is likely to go without a pullback?  

Clearly, as you can see from the longer-term S&P chart, it DOES happen.  Sometimes we get to 15% over the 200 dma (1,773 at the moment) and, as I said, if we pop over 1,700, that's exactly how long we'll play it bullish before going short again.  USUALLY, however, 10% is plenty and we tend to get a correction all the way back to the 200 dma (currently 1,542) again over the next quarter:

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