It's been slow steady progress for the bulls as they make the rally 11 days in a row and new all-time highs 5 days in a row. There seems to be little in the way of higher prices, except for perhaps the level of complacency creeping into the market. But clearly the bulls rule for now.

Today's Market Stats

While the past 11 trading days haven't seen big rallies they've been enough to consistently tack on more points and keep the bulls fully in control. Resistance levels have been swept aside as sellers remain absent. The bears are in shock and the bulls are gleeful. When that sentiment will reverse is anyone's guess but for now we no indications that a top is nearby.

As I'll show in the review of the charts, the current rally looks like it could continue into a possible blow-off top. But at the very least, price action keeps the market bullish and it's a dangerous time to be thinking about shorting it. The rally could have finished today or it will finish in the next day or the next week or month but for now we're seeing a steady rise higher with only small corrections, and that's a bullish pattern. There's a lot of hope in the air and that will always goose the market higher.

But just because the market is looking bullish now, and could continue to look bullish for weeks to come, it's not a time to be complacent about the upside. If you have high confidence in this rally and practically no worries about the downside then you'd be part of the bullish crowd and from a contrarian perspective it's not a time to throw caution to the wind and join the bullish party.

Investors Intelligence (II) has a proprietary measure of bullishness vs. bearishness of 100 financial newsletter writers and the recent readings should make us concerned about the life of this rally. The sentiment reading is now the most bullish it's been for the past 10 years. From a contrarian perspective that means it's time for caution.

The II reported last week that optimistic newsletter writers climbed to 62.7%, the highest it's been since 2004. That means even into the 2007 market peak we didn't have this many optimistic newsletter writers. The reading tends to peak ahead of a market top while it bottoms at market bottoms. For a gauge, above 55% is a time to be cautious since it typically signifies a market top is forming. According to II, when the reading gets above 60%, where it is now, "it is time to start taking defensive measures."

Assuming the II reading will still be above 55% after this week it will have been 3 months above 55% and so far it's been above 60% for the past 4 weeks. So it's clearly not a market timing tool but it does give us another reason to be cautious instead of giddy about this rally.

There are more than a few sentiment indicators and they all suggest the same thing -- there's a great amount of hope right now that the Trump administration will make a big difference in our economy and to the bottom line of many corporations. The danger is that so much of this rally has been built on hope rather than results and we still don't know how much success Trump's team will have implementing these changes.

If the immigration Executive Order is any gauge, the changes will be tough to make. A rally built on hope is a dangerous rally because sentiment could turn on a dime and the big air pocket below us could be filled quickly. At this point I'd say enjoy the ride if you're long but keep your eyes and ears open and trail your stops up behind you. You want to be one of the first ones out the door when the market turns.

Another challenge for the market, although you wouldn't know it with the rally we're seeing, is how consumers are tapped out. They're not the ones joining this rally. Americans are filing bankruptcy at the fastest rate in years and rates for December and January increased, which makes it the first time we've seen a month-to-month increase in bankruptcy rates in 7 years.

More companies are also starting to declare bankruptcy and rising interest rates are not helping. In an era with abnormally low interest rates, and all the borrowing that went along with that (isn't that what the Fed was trying to prompt?), we have over-indebted consumers and companies, as well as the Federal government, but at least they can print their way out of it, for a while. Destruction of debt will create a headwind for the Fed since it will add to the deflationary pressures, which we see in the continued decline in the velocity of money.

A consequence of the level of debt for consumers, with the decline in their income/cost ratio, is that they're not the ones participating in the current rally. Corporate buybacks (they continue to borrow heavily and use profits to fund their buybacks instead of investing in capital growth projects) support the market. Add in the hopes and dreams of success with the expected (hoped for) Trump changes and we have reasons for the rally but leaving out the consumer is not a good recipe for longer-term success.

I'll start tonight's chart review with a longer view of the SPX monthly chart to show the pattern since the 2000 high and then work my way in with closer views.


S&P 500, SPX, Monthly chart

There are a couple of things to point out on the SPX monthly chart below. First is the "simple" way to stay with the trend -- long when the 21-month MA (blue) is above the 8-month MA (red) and short (or out) when the MAs reverse. Other than getting shaken out prematurely with the decline in the January/February 2016 lows, and then back in in August 2016, it's been an easy way to ride the trend. This method will keep you in or out of the bulk of the move and help you avoid losses in major downturns while keeping you in the uptrend for as long as possible.

The second thing to point out is the broken uptrend line from 1990-2002 (bold green), which was back-tested in 2015 and is now currently near 2425. It will be near 2500 by the end of May. That gives us an upside target, in time and price, if the bulls can keep this going for another couple of months. It might also be accompanied by another test of the downtrend line for the lower RSI peaks since 1996.

The rally from January/February 2016 can be counted as the 5th wave of the rally from 2009 and if that's correct then we'll be due at least a large pullback correction of that move in the next year or two. If we're in the next secular bull market off the 2009 low we could get a pull back to support near 1550 before heading higher. But if we're still in the secular bear, which I believe we are, the next leg down in this megaphone pattern will be a doozy, one that will make the 2007-2009 decline look like just a small correction.


S&P 500, SPX, Weekly chart

Since the 2009 low there's been a 23-week cycle that has done a good job identifying market turns, mostly highs. The next one due is the week of February 19th, which is next week. Interestingly, at the same time this cycle is calling for a turn we can see SPX has made it up to the top of a parallel up-channel (arithmetic price scale) for the rally from 2009.

SPX made it above the top of the up-channel in 2014, remained above the channel for the most part into 2015 and then dropped back into and down to the bottom of the channel with the decline from May 2015 into the January/February 2016 lows. Now it's back up challenging the top of the channel when the next 23-week cycle date is arriving. It can of course continue to press higher but this chart says be very careful about those expectations.


S&P 500, SPX, Weekly chart

In my "normal" weekly chart of SPX you can see this week's break above the trend line along the highs from April-August 2016, currently near 1332. This break is bullish because it's a breakout from a rising wedge pattern and that's to be respected by the bears. Never challenge a breakout, especially if a pullback finds support at the top of the wedge and continues higher from there. What we can't know yet, and must be watchful for, is whether the breakout will be a 1-week break that leads to drop back into the wedge (leaving a fakeout breakout with a throw-over finish) or if it will continue higher next week. A drop back inside the pattern, with a drop below 1332, would create a sell signal. But at the moment this has to potential to run much higher.


S&P 500, SPX, Daily chart

The daily chart below shows the breakout yesterday above the top of its rising wedge (broke out on Monday if looking at the top of the wedge as the trend line along the highs from August-December 2016) and how it simply added to the breakout today. This is what looks bullish and it remains bullish as long as it doesn't drop back into the wedge with a decline below 2332.

Key Levels for SPX:
- bullish above 2333
- bearish below 2285


S&P 500, SPX, 60-min chart

There is a dangerous sign on the 60-min chart and that is the parabolic move for this rally. Whenever you can draw 4 steepening uptrend lines, as I've done for the rally from December 30th, it's a sign of exuberance that typically does not end well. A break of the 4th uptrend line, near today's close at 2349, would be a warning signal and a break of the 3rd uptrend line, currently near 2340, would be a good indication that a high is in place.

Keep in mind that parabolic rallies tend to retrace to their starting point (the December 30th low at 2253) and that a rising wedge retraces more quickly than it took to build it (back down to the start of the shorter-term rising wedge at the November low near 2084 and then the larger rising wedge that started from the February 2016 low at 1810).


Volatility index, VIX, Daily chart

Speaking of wedges, the VIX has been building a descending wedge since its peak in November and is showing bullish divergence since the end of November. It's hard to trust movements in VIX during OPEX week but there was a big jump today (up +11.5%), which could indicate there are some non-believers in this week's rally. Does someone know something? Is big money getting ready for a big reversal? It's too hard to tell but it does add one more item in the "worry" column, especially with a rally that's going parabolic.


Dow Industrials, INDU, Daily chart

The Dow has also broken above its trend line along the highs from April-December 2016, currently near 20,500. As long as the Dow stays above that level it remains bullish, especially if a back-test of that level holds as support. Below 20,500 would leave a failed breakout attempt.

Key Levels for DOW:
- bullish above 20,500
- bearish below 20,015


Nasdaq-100, NDX, Daily chart

With today's rally NDX has also bullishly broken above its trend line along the highs from April-August 2016, currently near 5280. I've drawn steepening uptrend lines for its rally since November as it too is going parabolic. It could run a lot higher but the higher it goes the more vulnerable it becomes.

Key Levels for NDX:
- bullish above 5285
- bearish below 5168


I'll first show the RUT chart and then some comparisons to other charts to point out how the RUT can still be used as a sentiment indicator.

Russell-2000, RUT, Daily chart

The RUT has finally joined the bullish party by making new highs this week. Last Friday it broke out of the bull flag pattern off its December 9th high and now it looks like it might finally be able to make it up to the trend line along the highs from 2007-2015, currently near 1412. This is a longer-term trend line and marks what could be the top of a large megaphone pattern that I've shown on its weekly chart in the past. We could easily see a throw-over above the line so I wouldn't use it as a hard resistance level. But over the next couple of weeks it's going to be very important to see how price behaves around this trend line.

Key Levels for RUT:
- bullish above 1415
- bearish below 1349


At the beginning of the report I discussed sentiment and another measure of sentiment is to see what the RUT is doing. When small-cap stocks rise faster than large stocks, it's a sign that investors are willing to take on more risk in the market. It often leads to higher stock prices across the board. But when small caps lag behind large-cap stocks, it shows that investors may be getting worried and a correction/decline could soon follow.

One way to measure the strength of the RUT is with a relative strength (RS) chart, which is shown below. Since the December highs for the indexes the RUT has underperformed SPX. Off last Wednesday's low the RUT has joined in the rally and while this week it has finally been able to join in with new highs, it remains weak relative to SPX.

Relative Strength of RUT vs. SPX, Daily chart

Notice the RS of the RUT off the November low -- the RUT was outperforming SPX and that's exactly what you want to see in a rally. But since the December high the RUT has been underperforming SPX, including today, and that's a warning sign that the market's participants are not feeling as bullish as the broader indexes would have us believe. It's a warning sign but not a show stopper.


SPX vs. Relative Strength of TRAN vs. UTY and XLY vs. XLP, Daily chart

There are a number of ways to check on the underlying strength (or weakness) of the market and I noticed a parallel between the RS of the Transports (TRAN) vs. Utilities (UTY) and Consumer Discretionary (XLY) vs. Consumer Staples (XLP), which is shown on the chart below.

The first comparison, TRAN vs. UTY, shows us whether or not the market is feeling bullish about the economy, and investing in the transportation stocks, or if they're feeling more defensive and investing in dividend-paying utility stocks.

The second comparison shows us whether consumers are feeling flush and optimistic and spending more on discretionary items (flat screen TVs, recreation, etc.) or if they're pulling in their horns and spending on what they have to (toothpaste, toilet paper, etc.). The consumer is once again saddled with enormous debt, as are corporations and our governments and it will likely show up in less spending.

The TRAN is underperforming UTY since December and Consumer Discretionary is underperforming Consumer Staples, both of which tell us the market is turning defensive (not that you'd know it by price action in the big indexes.

I found it interesting that the two RS charts track each other closely, as can be seen on the bottom chart below. And they both have been in decline since December while SPX has continued to make new highs. For now it's just another warning sign but one worth noting.

There are other signs that the rally is occurring on the backs of fewer and fewer stocks, which is typically seen as a market forms a top, not in the middle of a larger rally. As an example, the advance-decline line and new 52-week highs are both putting in lower highs as the broader averages make new highs. The rally looks good on the surface but underneath the hood we see some problems developing.


10-year Yield, TNX, Weekly chart

The short-term pattern for Treasury yields is not clear enough to make a higher-odds prediction for the next move but I think yields will either head lower from here or after one more new high. There's a possible sideways triangle forming since the December 15th highs and the triangle would look complete with one more pullback before heading higher.

As shown on the TNX weekly chart below, there's an upside projection at 2.687% if there's a little more upside left. A drop below the January 17th low at 2.313 would be a heads up signal that a top is already in place. The flip side says a rally above the December 15th high at 2.621 would suggest the higher target could be achieved sooner rather than later.


KBW Bank index, BKX, Weekly chart

Like the RUT, the banking index finally broke out of its consolidation off the December 8th high. Today's high for BKX met a price projection at 97.07, with a high at 97.25, where the 5th wave of the rally from 2009 equals the 1st wave. But there are higher projections, including one at 102.19 where the 5th wave of the rally from June 2016 would equal the 1st wave. Coinciding with the 97.07 projection is a projection at 97.21 where the 5th wave of the rally from June 2016 is 62% of the 1st wave. As long as BKX stays above the top of an expanding triangle for its consolidation pattern from December, near 94.80, it will stay bullish. But at this point there are enough pieces in place to call a top at any time.


Transportation Index, TRAN, Daily chart

Today's rally created a new high for the TRAN as well, which is obviously bullish even if it is underperforming the broader averages. It has now met a price projection near 9534, with today's high at 9566, where the 2nd leg of the rally from June 2016 is 162% of the 1st leg. The bulls need to keep this rally going in order to prevent a triple top against its December and January highs, especially seeing the bearish divergence at the new price highs.


U.S. Dollar contract, DX, Daily chart

The US$ got the bounce I expected to see off its February 2nd low and while the bounce could make it further I think it has accomplished what it needed to and is now ready for a continuation lower. Today's rally made it back up to the top of a parallel up-channel from May 2016, which it dropped back inside of in January, and in doing so it climbed above its 50-dma at 101.33. But it was unable to hold the day's rally and dropped back down into negative territory for the day and closed below its 50-dma. The shooting star candlestick looks like a reversal candle and a down day for the dollar on Thursday would confirm it.


Gold continuous contract, GC, Daily chart

If the dollar starts back down it could help give gold a lift higher and for the moment I'm showing the potential for gold to bounce up to 1273.20 where it would achieve two equal legs up from December 15th. It has met the minimum expectation, at 1237, where the 2nd leg up is 62% of the 1st leg up so it's possible it will head lower from here. A drop below the uptrend line from December, near the 20-dma at 1219, would signal a top for the bounce could already be in place and below 1180 would confirm that. But first we'll see if gold can at least challenge its broken 200-dma near 1265.


Silver continuous contract, SI, Daily chart

Looking to silver for some guidance, it too has a little more upside potential to 18.32, where it would achieve two equal legs up from December 20th. But currently it's fighting to get through resistance at its broken 200-dma at 17.94 and its downtrend line from July 2016, near the same level. It would be short-term bullish above Tuesday morning's high at 18.09 and more bullish above 18.32 but at the moment it's vulnerable to a reversal back down from here. Watch for gold and silver to be in synch otherwise it's difficult to trust the direction for either.


Oil continuous contract, CL, Daily chart

Since the high at 54.51 on December 12th at 54.51 oil has been consolidating sideways in a tightening range. The consolidation pattern can be viewed as a bullish ascending triangle, which portends a breakout and rally to new highs for the bounce off the August 2016 high. A projection for a new rally leg would be the top of a parallel up-channel for the rally from August 2016, which will be near 57.25 by the end of the month. It would be confirmed bullish above 55.

But if oil drops below price-level S/R near 51 it would be bearish, in which case I'd look for a test of its 200-dma, currently at 48.17, and then the bottom of its up-channel, perhaps near 46 in March. The longer-term pattern and the corrective bounce structure off the August 2016 low suggests the entire bounce pattern will be retraced.


Economic reports

There were a slew of economic reports this morning and they were mixed. CPI data confirmed Tuesday's PPI data that shows inflation on the rise. It has many wondering if the Fed will try to head inflation off at the pass or let it rise past their goal in an effort to help the government pay back its debt with inflated dollars.

Retail sales and the Empire Manufacturing index were stronger than expected and that helped the bulls this morning. But Industrial Production declined more than expected, into negative territory, so that's not a good sign for our economy.

Thursday morning we'll get the unemployment claims data, housing starts and permits and Philly Fed index, none of which are likely to be market moving.


Conclusion

We have a plethora of signals that tell us the stock market's rally should not be trusted. We have multiple signs of deteriorating market internals while bullish sentiment runs high. We have multiple signs that show us the rally is occurring on the backs of fewer and fewer stocks and that important sectors are weakening relative to SPX. The rise in VIX is telling us smart money could be preparing for a reversal. With a very low VIX and the contraction in price volatility it's a dangerous time to be complacent about the upside.

The S&P 500 hasn't had a 1% intraday move since December 14th, which is the longest it's been this quiet in the history of record keeping. Quiet periods like this are always followed with a much bigger move (volatility) and from here that begs the question about which direction the big move will be. Will we see an acceleration higher or will it turn down sharply?

The most important indicator to follow is price, which means all of the cautions mentioned above are meaningless as long as prices keep heading higher. Price is king. But what we have are reasons to keep your eyes and ears open for the possibility of a nasty surprise. The rally is extended (overbought on multiple time frames), overloved and running on fumes (fewer participating stocks) and while none of that is a rally killer they are reasons to be cautious from here.

Don't get complacent and then get walloped some morning with a big gap down. It's a time for caution (peel off profits on long positions you're most worried about) and if you're a bear itching to get into the game, I suspect your time is coming very soon but not yet. There are no indications of a top yet and no reason to step in front of all the rising knives.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT