Bulls in ‘Buying Stampede’ Catch Breath as Draghi Says If

Well, that Mario Draghi rally in stocks didn’t last long.

Europe’s regional index jumped as much as 1 percent and futures on U.S. equity benchmarks rose after the region’s central bank chief said policy makers were united on the possibility of more stimulus. European equities have since flattened out while the futures rally turned out to be an over-reaction.

One reason for the fade could be the dissection of his remarks. Yes, the central bank’s leadership “has tasked relevant euro system committees with the timely preparation of further measures to be implemented if needed,” Draghi said at the press conference. That “if” is a big one, especially given all the reports lately that suggest ECB policy makers are getting along about as well as Paul McCartney and John Lennon during the recording of “Let It Be.”

The phrase “if needed” likely means different things in Rome and Frankfurt, and what exactly is meant by “stimulus” is also open for debate.

Layer on that signs of fatigue in the market after the S&P 500 rebounded almost 9 percent from its six-month low on Oct. 15 through yesterday. To borrow the words of Jeffrey Saut of Raymond James Financial Inc., it was a “buying stampede.” He noted that rallies like that often exhaust themselves somewhere between day 17 and 25, and here we are sitting at day 16, suggesting to Saut a pause by the end of the week.

Buying Momentum

One way to put a radar gun up to a stampede like that is the 14-day relative strength index, which measures momentum by comparing the size of recent gains to recent losses. Yesterday the RSI -- that’s short for the relative strength index, not the repetitive stress injury that comes from hitting the buy button over and over -- reached 65.5.

That’s the highest reading since Sept. 5, and the S&P 500 didn’t close much higher than that before it began a 7.4 percent dip later in the month. Seventy is considered to be such an RSI danger zone that there’s a red horizontal line at that level right there on the chart. It’s gone above that level less than a dozen times in the past year. There’s a green line at 30, and that’s the line it dipped below on Oct. 15 for the first time in almost two years.

Other signs that risk appetites may have been satiated for the time being include underperformance in the past week in gauges small-caps, Internet and biotechnology stocks, even though the last group is rallying today amid takeover speculation.

There is a big, looming catalyst tomorrow that could keep the rally going, of course. Economists estimate that government data will show the U.S. added 235,000 jobs last month, so attention is moving quickly away from Europe to a U.S. economy that don’t need no stinking stimulus, thank you very much.

At least until the jobs data, it looks like stock bulls might follow the words of wisdom described by Paul McCartney and just Let It Be.

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