The Most Flawed Rally You Can’t Not Like

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Momentum-wise, the market leaves nothing to be desired. Friday's gain of 0.36% made for a nice ending to a weekly gain of 0.81%, and marks the third straight weekly gain, as well as the ninth weekly gain for the past 14 trading weeks. The S&P 500 is now up 11.1% from its early November low.

Breadth and depth were commensurate with Friday' gain for the S&P 500, which by the way was mirrored by the other key indices. For the NYSE, 69% of it listings were up on Friday, versus only 27% being down. The Big Board's 'up' volume was a little more than twice as strong as its 'down' volume. For the Nasdaq , its advancer/decliner ratio was 68%/27% (with 5% being unchanged), while 77% of the Nasdaq's volume was driven by rising stocks. Only 22% of Friday's action for the Nasdaq was bearish.

Though technically overbought and fundamentally overvalued, rekindled chatter from Washington, D.C., about tax relief inspired Friday's gain, which was led by the basic material sectors' 1.51% advance. At the other end of the spectrum, healthcare stocks were the worst performer, though they still gained 0.1% for the day.

The day's best and worst large caps were from neither sector though. Video-game maker Activision Blizzard, Inc. (NASDAQ: ATVI ) jumped nearly 19% on strong revenue growth and a big revenue beat . Online business directory and review depository Yelp Inc (NYSE: YELP ), on the other hand, saw its stock plunge nearly 14% on the heels of a disappointing 2017 outlook .

Broadly speaking, the bulls have plenty of momentum, and with just a superficial look it doesn't appear as if the buyers are intending to stop anytime soon. This rally may be running on little more than fumes, though, as it gets a little too long in the tooth.

The S&P 500 - one of the last "record high" holdouts - finally got the job done on Thursday, and followed through on Friday. The prior peak and ceiling at 2,301 is now in the rearview mirror. It was enough to leave behind a bullish MACD cross and carry the index to a new horizontal trading range.

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First and foremost, the S&P 500 is now 7% above its 200-day moving average line, which is more or less at the limit of how far it diverges from that long-term moving average line before it gets reeled in. Last August, the S&P 500 raced as far as 6.9% above its 200-day moving average line, setting up three months of weakness.

Second, as well as the market is moving now, there's a distinctive lack of volume in light of the momentum it has got going for it. Rallies should gather participants on the way up if they're going to be sustained. This one isn't doing so. Indeed, volume is waning on the way up.

Finally, as encouraging as it is to see stocks make bullish progress, we're not seeing decisive bullishness everywhere we need to see it. The Russell 2000 has yet to break into new-high territory, after setting the bar at 1,393 back in early December. If investors were feeling truly bullish, they'd be buying the more speculative small caps.

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It's arguable that the Russell 2000 raced ahead a little too fast in November, and didn't have as much room to keep moving higher. Since 2014, however, small-caps have been sub-par performers; they're not likely to be hitting such a headwind, even after a heroic move in November.

Conclusion: This is a flawed rally, but that doesn't mean it's a doomed one. Sentiment can and will do amazing things for longer than it seems it should, and there's no denying President Donald Trump is injecting a massive amount of pro-business sentiment into the market's fuel tank right now. That's not a train anyone wants to step in front of, though do know sentiment can stop and turn on a dime.

To that end, should the Russell 2000 break below its 20-day and 50-day moving average lines and/or the S&P 500 peels back below its 50-day line, the sentiment pendulum could swing the other way in an instant. Anything less, and even a small pullback may not be enough to convince the bulls there's a reason to stop buying.

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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The post The Most Flawed Rally You Can't Not Like appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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