Why I’m not buying today’s rally

The next few trading days are going to be very interesting and very important.

While stocks are seeing a nice Monday bounce, my view is that the jury is still out when it comes to this rally.

We certainly got some relief out of the election results in France. Centrist Emmanuel Macron and far-right candidate Marine Le Pen are headed for a runoff, and most see an ultimate win by Macron, a pro-European Union former investment banker, as very likely. This has given the S&P 500 a boost of about 1 percent on Monday morning, and there could be a lot of upside potential ahead.

However, we also have to realize that the markets were not pricing in a problematic outcome. France's CAC index & the Europe STOXX indexes have been rallying into this election. Yes, they both fell slightly in the prior week, but both were very close to their 2017 highs.

Contrast that with the other highly significant elections we've had recently. In the weeks leading up to (and immediately following) the Brexit vote, the UK's FTSE index had sold off by 7 percent. Similarly, in the weeks leading up to the U.S. election, the U.S. stock market fell by 5 percent. In both cases, then, the markets were much more ripe for a rally than they are this time around.

Of course, those two previous outcomes were viewed as negative developments (at least at first), while the French election results are being viewed as positive, so maybe we will indeed see some nice upside follow-through from this 20-plus-point pop in the S&P this morning.

However, the market setup does matter. And right now, the short interest on the SPY (S&P 500 ETF) is at 10-year lows. In the U.S., meanwhile, the White House is now saying that this week's announcement of their new tax plan will be very broad and that the details won't come until June. This all leads us to wonder if the positive news from the French election has already priced in with the market open.

Therefore, it will be very interesting to see how much follow-through we get from the S&P's opening level of 2,370. It will be important to see if the market can keep rising into the close, and as we move through the next couple of trading days.

There are certainly reasons to think that stocks could indeed keep rising. Monday's rally has taken the S&P back above its 50-day moving average, and the Nasdaq composite has opened at a fresh record high. But on the other side of the coin, crude oil remains below $50, and the Treasury yield curve (a classic indicator of economic optimism) is not steepening on this news. In fact, the spread between the yield on the U.S. 2-year note and the 10-year note have actually flattened slightly this morning, due to a sharp rise in 2-year yields. And this is before we get to all the question marks surrounding Trump's much-anticipated policies.

What we're saying is that it's great that this "initial" reaction to the French vote is a very good one. However, the stock market's overall setup is not ripe for rally, and valuations are very stretched. Therefore, we think it will be a good idea to hold off for a few days in terms of making a bet as to whether the French election will lead to a multiweek rally.

And let's face it — the initial reactions to the last two key elections turned out to take markets the wrong way in hindsight.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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