The last two weeks of May saw a return to more volatile markets. Investors tried to absorb the US Federal Reserve’s intonations regarding the paring back of the QE3 bond buying program. This led to a near termed selloff. That selloff was tempered after a poor GDP report, higher unemployment claims, and a lower than expected pending new homes report on Thursday. The current formula, it would seem is:
Bad economy = QE ongoing = stock market up
Good economy = QE slows or ends = stock market down
The question of the moment is, should one buy stocks now, or should we wait for a pullback?
It’s tempting to believe that the market may not take a breather, given its unbelievable resilience of late. My opinion regarding whether to buy or not is simple: Stick to your discipline.
If you follow seasonal patterns, as I do, and like to reduce (not eliminate) your equity exposure in the spring, don’t be tempted to sidestep this discipline. If you place faith in momentum indicators and chart patterns to identify potential turning points, and those indicators are suggesting an overbought condition, don’t deviate from your assessment.
Despite the temptation of vertically moving markets, we have the following conditions that imply a likely near termed market correction- at least according to my discipline. In fact, it does appear that such a correction may have recently begun. Click on the chart to enlarge the following observations:
- RSI, MACD, and Stochastics have rounded over
- Parabolic rise from mid-April – markets need to go sideways or fall to return to trendline
- % over 200 and 50 day MA’s indicates overbought conditions
- Engulfing reversal pattern on May 22nd
- Record high margin debt on the NYSE can indicate speculative environment
- June is, according to Don Vialoux, seasonally the second weakest month of the year.
I continue to hold some cash, with my eye on the S&P 500 to provide a buying opportunity into the 1550-1600 area.