Last week saw a stock market rally that brought a lot of calls for a new bull market. However, as I wrote on Monday, I don’t think the real opportunity to buy into the stock market from an investment perspective is going to come until much later. The S&P 500 has big resistance in the 4185-4300 area and stalled out yesterday below this zone. The S&P 500 is overought, in terms of its daily stochastics, much as it was at the end of March. It’s most likely to now just drift for a bit, not doing much one way or the other.
I doubt the S&P 500 is going to just go straight down. With this action, I’d expect it to go sideways for the rest of this week and maybe another one before turning down again. After a quick gain like we saw last week usually you get sideways action after the market gets overbought and shows weakness.
One problem the stock market has is that much of the action underlying the market is being driven by the bond market, which is in a bear market.
Just as the S&P 500 rallied last week it did so with a big oversold bounce in junk bonds, as you can see from the JNK ETF.
The JNK ETF is in a big bear market, trading well below its 150 and 200-day moving averages, but finally has put on its strongest bounce of the year off of its May lows.
However, that bounce simply created a big overbought technical condition in JNK and now it looks like it topped out with the action of the past two days.
A top in JNK is a negative for the stock market.
Sure, the S&P 500 and Nasdaq could possibly go sideways and have another jump up before rolling over for good, but I wouldn’t bet on that.
This week’s action so far and yesterday’s weakness shows why it is so difficult to try to make money in a bear market by playing stock market rallies. Luckily commodities remain in a bull market, with oil making a new high for the year this week. Personally, I’d use the current overbought reading in the S&P 500 to take some money off the table and raise some cash reserves to use later. The saying let runners run and sell losers is a famous mantra for trading, because it is a useful one. This might be good time to sell losing positions you may have that are lagging the performance of the S&P 500. It’s not worth trying to time an exact top of a rally like this, so you gotta take advantage of it when you can.
The Fed finally began to pair back its QE bond buying operations on Wednesday, something it should have done over a year ago.
-Mike
