Momentum Monday – Back Above the Range. Is the Rally a Trap?

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SPY and QQQ are finally back above their 50-day moving average. This means that the breakouts that failed in the range-bound market in August are now more likely to work. TWTR is a good example. It was stuck between 40 and 43 for six weeks and now it has finally cleared its range.

What astounds me about this rally is lack of leadership. SPY is less than 2% of its all-time highs and there are very few stocks that we can highlight as leaders. The software and cloud names which have been leading for two years are still under tremendous pressure.

Typically new leaders emerge after a correction but the recent decline was not large enough to justify as a correction. This means that the so-called old leaders were supposed to bounce and be among the outperformers of this rally. Many of them have already experienced 20-40% drawdown, so if this rally has more legs, they should be bouncing. 

Some might say that software is in the toilet bowl because of over-stretched valuations. This is a strong argument but if people care about valuations, this rally is not going to last long. In other words, the indexes are still one tweet away from a reversal. While we are going to take some shots on the long sides, we are not going to jump with both feet.

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