A Powerful Rally Is Coming

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The market has reached extreme oversold conditions from which powerful rallies almost always arise. Two weeks ago, Jason Goepfert pointed out that there had only been 18 similar days since 1984 in which more than 29% of stocks on the NYSE hit 52-week lows and more than 33% on the NASDAQ. This morning, Willie Delwiche showed that there have only been six days in the last one hundred in which new highs on the S&P 500 exceeded new lows – the worst reading since October 2008.

The reaction to Wednesday afternoon’s Fed Minutes also supports this thesis. The market rallied Wednesday afternoon after the minutes and again Thursday suggesting that 50 basis point rate hikes at the next two meetings are now priced in.

The reaction to Nvidia’s (NVDA) earnings report Wednesday afternoon is also supportive of a big rally. While NVDA’s 2Q revenue guidance came in weak and the stock closed the after hours down 6%, in today’s cash session it opened at the low and rallied hard all day to finish +5% on big volume. Again this suggests that all the bad news is priced in.

Finally, market sentiment is extremely negative. Most investors seem to be leaning heavily bearish. If the market continues to move higher, they will scramble to cover their shorts and add longs.

For all these reasons, the conditions are in place for a powerful rally.

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