Market Insider

Stock market's wild flip flop comes as warning signs build

Key Points
  • Tuesday's big stock market flip flop comes amid signs stocks are technically 'overbought.'
  • Strategest Laszlo Birinyi said the market appears to be heading into a period of consolidation and he is currently not setting a target for the S&P 500, since he does not see a 'defensible' level.
  • Birinyi said he does not expect the market to go down but more likely consolidate in a sideways range.
Caution tape hangs near the steps of Federal Hall across from the New York Stock Exchange in New York.
Michael Nagle | Bloomberg | Getty Images

The Tuesday comes as some analysts see signs the rally is getting a bit overheated.

Laszlo Birinyi, longtime strategist and founder of Birinyi Associates, said earlier Tuesday that he sees clear signs the market is going into a period of consolidation, and he is currently not setting a target for the S&P 500, after it crossed his last one at 2,760.

Birinyi does not see this as a time to sit out of the market, but he says it could trade sideways for awhile.

"We like to be able to defend our targets," he said, adding he is holding off on a target until he sees the market shake out. "When we come up with a round number we use a trading range of the market, and that has served us very well. Right now, the market is at the upper end of the trading range. It's 5 percent over its 50-day moving average, and those are areas where the market tends to digest, consolidate, take a breather but not go down."

The S&P 500 and Dow both hit big round numbers in early trading Tuesday, with the S&P 500 crossing above 2,800 for the first time, and the Dow racing above 26,000. The Dow zipped from 25,000 to 26,000 in just seven trading days, its fastest 1,000 points ever.

But that was the morning. By afternoon, the market was in a mini panic attack, and stocks collapsed, turning the Dow's 283 point into a 100 point loss, before leveling off. It was the Dow's biggest intraday swing since Dec. 1. The Dow closed down 10 points Tuesday at 25,792, while the S&P fell 9 to 2,776.

The S&P 500 has been rising so quickly, it has already topped or matched some of the Wall Street analyst's year-end 2018 targets, The median target is currently 2,975 for year-end, about a 6 percent gain from current levels. The S&P 500, however, has already added 4 percent since Jan. 1.

Birinyi said the market experienced a similar period of consolidation in March, 2016, and at that point the market moved sideways for two months.

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"You're not going to have tail winds. You should just be very concerned about your stock selection but not do not take any action, not making changes, maybe build up a little cash. Historically this is a time when the market goes into a digestive period," he said.

He noted the swing in some high fliers like Amazon, up to $1,339 earlier in the day before sinking back to $1,304. He said a key to near term trading could be how Amazon, Apple and Google go through earnings period, when they all report Feb. 1.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said the market is flashing overbought signs in a number of ways.

But one he pointed to was the monthly relative strength indicator for the Dow.

"The monthly relative strength index in the Dow in at least 100 years has never been this high," he said. "It reflects an extraordinary level of overboughtness," says Boockvar.

"Interest rates are going higher. Monetary policy is not your friend anymore. We have not only extreme technical patterns but extreme sentiment," Boockvar said.

He said earlier this month there was a seven year high in the number of bulls in the American Association of Individual Investors sentiment survey. Investors Intelligence also had the highest bull bear spread since 1986, he added.

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