There’s a third and somewhat over-worked option. This includes investors who don’t, or won’t, sell at all. They’ve been lulled into believing stock market prices always go higher, always, except for occasional bear markets. And truth be told, an investor who bought the S&P into the highs of March 2000 would now be ahead, after 13 years, a little over 7% for a whopping gain of about ½% a year and after suffering through two painful bear markets (2000-2003 and 2007-2009) that resulted in losses of 50% and 58%, respectively. No worries. Right? Or he could have bought the S&P the S&P near 101 in August 1982 and would now be ahead nearly 1,550%. More proof that everything in the stock market is relative and that buying last year’s mutual fund results is not necessarily a road to riches.
Market Overview – What We Think:
- “New highs, new highs, new highs!” was again market call last week. But strength will prove to be same old market at some point, given the fact all cycles remain “Overbought” and vulnerable to corrective action.
- Minor Cycle will be first to give way, but we could nonetheless see some further price improvement toward 1700-1730—S&P 500 before game is up on lesser cycle. Whether short-term high comes sooner or later is of little importance except insofar as portfolio profitability is concerned. Extent to which short-term trend weakens will determine staying power of larger Intermediate Cycle and eventually Major Cycle.
- Of note is fact that our volatility measurements based on VIX data have not made new lows, despite higher prices since April 18. That is first such divergence from price action on Intermediate Cycle since November 16 and could be harbinger of looming top of Minor Cycle, and then on Intermediate Cycle.
- Also, while Cumulative Volume has been moving in same direction as S&P 500, S&P Emini, Dow 30, and NASDAQ Composite since November lows and since March 2009 bottom, on relative basis CV remains historically weak to suggest market underpinnings are not up to historical standards. Is that long-term bearish? We think it is.
- Nonetheless, until short-term decisively reverses larger Intermediate Cycle positive, we must regard all near-term negativity as just another corrective phase.
- In background, so long as pricing and indicators are not in synch on upside, as they were from March 2009 until May 2011, doubts will persist as to long-term viability of Major Cycle and we will continue to wonder how much longer market will be able to shake off unfavorable indicator divergences.
That’s why we like to take a more measured approach to market exits, and entries. First, we do our best to get a fix on market internals. What are all the indicators saying? Currently, all are positive, but negative divergences, mostly relative to the 2007 highs, persist. But the indicators have continued higher with pricing. That’s a qualified positive. Second, we look at the status of all cycles, Minor, Intermediate, and Major, both in terms of “Overbought/Oversold” status and trend direction. Right now, all cycles remain favorable, but historically “Overbought.” Then we look at “context,” a subjective notion, but it does provide a broad reflection of how others perceive the market. Recently, we have noted that many market prognosticators have been perplexed by the ongoing power of this bull trend. From our point-of-view that’s good, because it means they are off balance. That may not sound friendly, but the stock market is ultimately a zero sum game and some folks must lose.
Daily S & P 500 with Cumulative Volume (CV)
Weekly S & P 500 with Cumulative Volume (CV)