Hard To Believe

I was thinking this afternoon why it has been so hard to believe in this rally and it occured to me to look back at rallies since the 1970s bear market to see if the rate of change was more or less, and to my surprise the only rally that matched the current one was the rally off of the 1974 low, which was the nominal low for that secular bear market.

The current rally has advanced some 4424 points in the span of 12 months for a gain of 68.4% in the Dow Jones Industrial Average. The rally off of the 1974 low was approximately equal in rate of gain. However, it took 15 months to gain 68% from the 1982 low, 22 months from the 1987 low, 24 months from the same level in 1997 as the 2009 low, and 43 months from the 2002 low.

From that perpsective, we are witnessing something not seen in almost 36 years. It is reasonable for traders and investors to doubt the sustainability of such a rally. Indeed, a few months later in 1975, the Dow fell 28% over 18 months. Not a rip-roaring decline, but a long steady decline nonetheless.

Today, the Wilshire 5000 index closed slightly above the resistance level cited in yesterday's post. However, volume lagged again today, except for the Dow. The McClellan Oscillator is forming a larger negative divergence, and the negative MACD divergence continues for the Qs on the hourly charts. Perhaps these divergences will resolve themselves over time without a pullback or serious decline, but it doesn't seem prudent to believe that they will. I suspect something in the nature of a shakeout is coming. It's just a matter of when. As long as critical levels are not broken that will be an opportunity to initiate new longs and add to existing positions.