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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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 CNBC and 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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