Short Squeeze or New Up Leg in an Ongoing Bull Market?

Since the recent reaction lows of April 2nd, most major U.S. stock market indexes have posted solid gains. If we include today's intra-day highs, the S&P 500 notched a 6.41% gain while the Nasdaq Composite and the Russell 2000 saw advances of 7.23% and 7.36%, respectively over the last 13 trading days. Through any lens, these are spectacular investment returns considering the short period involved!

So what's the answer? Have we just witnessed a massive short squeeze within a NEW bear market (which began in late January 2018)? OR, should we categorize the dramatic declines in February and March as just natural "corrections" in an ongoing powerful bull market?

In the interest of full disclosure, I began shorting the U.S. stock market in the last hour of NY dealings today. Despite the fact that "after hours" U.S. stock market futures are higher this evening (Wednesday, April 18), I strongly believe that bearish forces will soon re-emerge that will quickly dominate the financial landscape (taking the obvious negative toll on investor capital).

For me, the bearish case is front and center as showcased in the banking sector. The under-performing Bank Stock Sector Index (symbol BKX) is weak and getting weaker despite supposedly bullish higher U.S. interest rates (and relatively strong recent earnings):

Bank Stock Index (BKX) Daily Chart with 200-day Moving Average Line

S&P 500 Index Daily Chart with 200-day Moving Average Line

Bottom Line: Higher U.S. interest rates, ongoing hawkish actions from the U.S. Federal Reserve, and relatively weak bank stocks will serve to castrate the overall U.S. market for equities on the immediate horizon. Lower stock prices are likely over the very near term, with a complete reversal of the recent advance and a probable violation of the key 200-day moving average line on the downside. And here is another negative chart in support for the bearish case: A sell signal was triggered today by my computer trading system in the Utilities Sector Index (symbol XLU).

Utilities Sector Index (XLU) with 200-day Moving Average Line (& computer sell signal today)

U.S. Stock Market - Short Squeeze Immediately Ahead!

The March 13th sell signal in most major U.S. Stock Market indices that was triggered in my computer trading system was fortuitous, to say the least (see previous posting from the evening of March 13th). 

S&P 500 Index with 200-Day Moving Average Line

However, despite this past Friday's steep losses, it looks to me like downside momentum is waning and that a significant short squeeze may be about to unfold. 

How can the stock market rally in the face of negative news such as President Trump's threat to impose $100 billion of new tariffs on China or Federal Reserve Chairman Powell's pledge to continue to raise interest rates? And let's not ignore the bearish increasing probability that the Republican Party will lose both Houses of Congress in the upcoming November 2018 elections! 

Quite frankly, I can't explain why the average U.S. stock price is only down about 10% since the late January 2018 record high. Given the current news climate (Trump's trade war!) and the hawkish apparent path of Federal Reserve monetary policy, I would have thought that U.S. stock prices would have corrected at least 20% from record highs by now. While I am confident that the current bear market will eventually see a correction of at least 20%, right now I see the increasing potential for counter-trend rally (short squeeze?)!

Here is the chart that should scare the bears the most (Tesla!):

Tesla (TSLA) Weekly Chart with 200-Week Moving Average Line

Tesla's stock price was actually UP more than 10% last week!! For a company that is burning through $1.5 billion in cash per quarter, Tesla's valuation is nothing short of miraculous! While Elon Musk, Tesla's CEO and resident wizard, may have discovered the secret of turning lead into gold, Tesla's stock price action last week suggests the alternative strong possibility of a takeover attempt on the near-term horizon.

Bottom line: While I continue to believe that a major bear market is now underway in the U.S. stock market, I see a meaningful "counter trend" rally immediately ahead. Bearish traders and investors need to cover shorts and remain sidelined until the next favorable sell-side entry point!