After being in a trading range for more than 15 months, the S&P 500 did indeed breakthrough its overhead resistance this week with a move higher. You can see that above … and even more dramatically in the volume-at-price chart here. The S&P 500 is now in uncharted waters. Which means you may need a stock exit strategy.
So … is it smooth sailing from here? I doubt it … but thestrength of the S&P 500 rally and breakout is not to be ignored. As investors we have to give it the benefit of the doubt … but doubts there are and it is definitely a time to be selective, cautious and fully in control of risk.
What doubts am I talking about?
Typically, stock market rallies are led by small-cap and mid-cap stocks. Gains in these smaller stocks indicate a wider appetite for risk taking and an appetite for risk fuels broad market moves.
That’s not what we’re seeing with this rally, however. The Russell 2000, for example, has not made a new high. It has bounced significantly off of its recent lows but it has yet to even trigger a new SSI entry signal. Take a look:
The same thing is happening with the tech heavy NASDAQ Composite. It’s moving higher, but has yet to make a new high or trigger an SSI entry signal.
So why has the market rallied?
The real impetus is what I told you about two weeks ago. The market-moving strategy in play is what I termed “Ameribuy!” – America, the United States in particular, is fulfilling its traditional role of the world’s safe haven. This is having a bullish influence on US stock market (particularly large cap stocks), US Treasuries, and the US dollar.
We have new historical lows in interest rates continuing to be made in spite of the new highs in the S&P 500 and the overall relatively good economic news. Of course, with interest rates in Europe at zero or negative, it’s not surprising that money keeps piling into US Treasuries.
The US Dollar continues its bullish run as the third leg of Ameribuy!
Money keeps pouring into the safest investments and at this point in time, it’s all about Ameribuy!
Finally, Gold continues to be strong, but has sold off from its earlier high.
The Commercial Hedgers net position continue to be very short and this is at historical minimum levels. All this happens on increasing volume. This could be gold producers using this move higher to lock in the price of some of their production.
The time-cycles for gold are also showing that we’re near a short-term top and the path of least resistance is to the downside.
Hold your gold … but it’s definitely not time to speculate on higher prices here … nor to initiate a new position if you’re late to the gold play.
The advice I gave you when the Brexit crisis hit is still my best advice. Follow the signals, make sure your exit strategies are in place, and by all means, turn off the telly!
Have a great weekend,
Richard M. Smith, PhD
CEO & Founder, TradeStops