Too Much Too Fast? DIA, SPY, QQQ

The last time the DJIA  and the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) increased by as much as it has recently the DJIA declined by 900 points afterwards.  Is that set to happen all over again?

Look back to October 2014 to see what I mean.  In October 2014 the market fell to test 15900 before starting its recovery, and in August of this year the lowest point was about 15400 (similar).

Subsequent to the declines in 2014 the Market staged an impressive reversal; it made positive headway in each of the following 7 weeks, eventually finding a peak at about 18000.

The recovery we have just witnessed, however, took only 4 weeks, and the market reached a high so far of about 17700.  We don't know if the rally is over or not, but there are coincidences.

At first glance one might think that the DJIA has more room to increase before it matches the recovery from October 2014's lows, but it has actually already exceeded that.  From the lows in October 2014 to the subsequent peak the increase was about 2100 points, but just recently the magnitude of the reversal was 2300 points.  The magnitude of this recent reversal is already greater than what we saw last October.

Not only that, but it happened much fast than last year's reversal, which begs the question has the market increased too much too fast?  Last year they thought so.

Let's look back at last year to see what the market thought about that 7-week rally. 

In December 2014 after the 7-week rally took place the Market found a top near 18000 and proceeded to decline abruptly and aggressively by 900 points.  This took about 1 week, and it was brutal.  Clearly, the market sold the rally back then.

Now, we have a rally of greater magnitude and shorter duration, so the question is will this year's rally be met with the same degree of selling pressure?  Was that too much too fast?

Nothing is set in stone, but Wall Street loves coincidences, investors love to rationalize their decisions, and this gives them every reason to do that.  If they decide to sell they could simply look at last year's move to justify their decision.

My advice is 'put up your defenses.'  It's not officially overbought yet but that can change after today.