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Why the 'quality' of the market rally is losing steam

The George Washington statue in front of Federal Hall on Wall Street is engulfed in a cloud of steam.
Gary Hershorn | Getty Images
The George Washington statue in front of Federal Hall on Wall Street is engulfed in a cloud of steam.

The stock market has seen a remarkable run. But we're seeing some signs that the quality of the rally is petering out in the short term.

After a 5 percent rise in the first three weeks of the year and a record stretch of time without a 5 percent correction, people seem to be afraid to say the market is about to pull back a bit. But it is exactly these kinds of times where this should be said, if the evidence is pointing in that direction.

Well, the evidence is certainly doing just that.

Consider this. First, the heaviest volume day of last week, by far, was the day when the market reversed lower, not on a rally day. Second, the groups that have led the market higher in recent weeks (energy, transportation, industrials) flattened out last week instead of rallying further.

Finally, we see the relative strength index on the S&P 500 hitting ridiculously high — and record — levels on both a weekly and monthly basis (88 and 87, respectively).

To be sure, I don't think we're about to see some kind of major top. Furthermore, these concerning signals do not mean the bull market is going to come to an end or even that we're at long last going to see a 3- to 5-percent pullback.

However, we should see a breather this week. This would be normal and healthy. The market has simply grown exhausted and needs to take a breather to digest its gains.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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