There are signs pointing towards a bullish market right now. The main ones being:
- A definitive break over the old highs of the mid 2900’s, and a higher low since last December.
- A market that remains above the 200 day SMA
At ValueTrend, we had concerns of the SPX failing at the old highs – which it had some 3 times over the past 18 months. That fear was eliminated when the market took out 2950 and stayed above that level for the past three weeks. Our three-bar rule confirmed that the recent breakout is legitimate. That, along with adherence over the 200 day/ 40 week SMA (red line on chart). For this reason, we reduced our cash holding from (then) an equivalent of 26% cash to (now) 16% cash in our conservative equity platform. For those interested, I had a 5% inverse ETF position, which I eliminated. That 5% position effectively “doubled” the equivalent in cash to have the effect of another 10% cash – which in turn gave me a total of 26% cash equivalent from my 16% of actual cash. Caution is our middle name, and I never regret putting safety ahead of risk. Here is the blog I wrote on how this strategy works.
I still think it’s prudent to hold a bit of cash for a few reasons.
- Seasonality suggests that markets can often be volatile until late October
- We are seeing some signs of “risk-on” again – which is good, so long as it doesn’t run away on itself. There are early signs of that potential.
Signs of risk-on
- The long bond hit old resistance after reaching an extremely overbought condition, and has been reversing. A rising long bond price is indicative of a flight to safety. As that price declines, it indicates a flight to riskier assets and away from safety. That’s a good thing, but you don’t want it going too far towards “caution into the wind”. Note the turndown on the TLT chart below. I placed a small (3%) inverse bet against the long bond a couple of weeks ago in our Aggressive Growth Strategy (VTAGS) for this reason.
- Some accounts of the market suggest an overbought condition. Note the % of stocks over their 50 day SMA’s chart below. This is a breadth indicator. You want breadth to be positive, but signs of “too much” participation can often signal neartermed pullbacks.
- Some indicators, like the VIX and the CBOE put/call ratio are nearing, but not officially into “complacent” territory. They are into their danger zones, but they may be getting there if things continue as they have. The VIX is indicated as “too complacent” when below 12. Note how low it went in 2017, and how long it stayed low. It was a party that looked to never end. Until it did – as 2018 and half of 2019 brought with it a go-nowhere market.
With the new highs on the market, we’re back to bull market status…. Something the market was NOT seeing since the end of 2017. A bull market is comprised of higher highs and higher lows. Recall —we had no new materially (lasting more than a few days) highs and higher lows over the past 18 months. See the top chart. We now have those conditions in place–higher highs, higher lows.
For the record: The June 19th low took out December 24th 2018 low. The new high this month took out the prior May 3rd high.
Yes, there are signs of this market being overbought. Plus there’s that seasonal stuff….
But the trend is the trend. Thus…I’m in, but I have a bit of cash. Just in case.
Keith’s next BNN television appearance is tomorrow Tuesday July 16th, 6:00pm.
Keith appears regularly on BNN Bloomberg MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management. (Note: Times and Dates may be subject to change)
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