Red Flags are Waving in the Last Place We Want Them

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Based on nothing more than a quick glance at Monday's action for the S&P 500 and the echoes of last week's headlines (that stocks tore into record-high territory), it would be easy to decide to be a buyer. When one takes a step back though - and sees just how far we've come since November without a clear reason - it gets considerably more challenging to be excited about the market's near-term prospects.

Yesterday, the S&P 500 rallied 12.15 points, or 0.52%, to end the day at 2,328.25. Basic materials once again led the way with a 1.13% advance, while telecom - the only losing sector for the session - fell 0.37%. The telco stocks retreated mostly on the news that Verizon Communications Inc. (NYSE: VZ ) was re-introducing an unlimited data plan that will almost assuredly force other wireless providers to respond. Vale SA (ADR) (NYSE: VALE ) came out as the best of the best, gaining 8.4% following reports that Chinese demand for high-quality steel is essentially insatiable .

Bond prices fell a bit, and yields edged a little lower in response; neither moved definitively. Ditto for the U.S. dollar, though its small gain on Monday extends what has turned into a two-week rally … tepid though it may be. Crude oil closed a hair higher, as did gold.

The lethargic effort from bonds and commodities suggests traders have adopted a "wait and see" mindset, knowing the equity market's undertow is technically bullish, but perhaps sensing this rally is ready to take a break. Perhaps it's even ready to make a full-blown swing in the other direction, with the S&P 500 now up 7.3% from its early November low.

It's an understandable concern, given the market's breadth and depth. The NYSE's advancer/decliner ratio was 1.5 to 1.0; 1768 of its listings closed higher for the session while 1172 fell. For the Big Board, 68% of its volume was "up" volume, and 31% of it was "down." For the Nasdaq, 58% of its volume was "up" and 41% of it was "down," with an advance/decline ratio of 1621/1171. That seems healthy, as does the Nasdaq Composite's gain of 0.52% and close at a record-high close of 5763.96. Overall volume remains quite unimpressive though, when it should be increasing; a rally has to gather more and more participants on the way up if it's to last.

Were that the only red flag, it might be dismissible. It's not the only red flag though. The Nasdaq Composite gave up a measurable amount of its intraday gain, suggesting some traders were starting to take profits as new highs were hit.

This late selloff effect is even more pronounced on the chart of the Russell 2000 , where evidence of a bullish conviction is even more important to a rally's future. Though the Russell 2000 managed to push its way past a prior peak of 1,392.72 for a while on Monday, by the time the closing bell rang, the bulk of that intraday gain of 0.7% was given back. The small-cap index peeled back to a close of 1,392.38, under the prior peak, and up only 0.25%. It's also on this chart we can see a distinct lack of volume - and waning volume - behind this rally.

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Conclusion: Don't fool yourself if you're opting to remain bullish here. This rally is running on nothing but speculation (mostly on hope for tax relief and a pro-business president). The bullish prods are recycled ones, but get traction each time they're used even if stocks aren't getting incrementally worth more. That's not a bad thing, necessarily. Momentum is momentum, and martyrs certainly don't get bonus points in the market.

In other words, the trend is your friend.

Make no mistake though - this effort is running on borrowed time. It's simply overextended, and there's not a lot of room left for any upside. The beginning of the swing in the bearish direction will most likely be marked, by all things, the VIX moving above its recent ceiling at 13.2.

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 Red Flags are Waving in the Last Place We Want Them 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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