Originally published by AxiTrader
Why would you sell stocks right now?
You just wouldn't would you, given the buy the dip crowd are so passionately buying on every dip.
That has dampened market ranges, moves and volatility so much that last week's 1.8% drop was a 5 sigma event (charts via @WSJ).
Of course it's patently ridiculous that such a relatively small move is such a big standard deviation event. And it reminds me that the absence of volatility is not the absence of risk.
But while risk exists to the economic and corporate outlook in the US it is clear that traders are backing the big lift in year on year corporate earnings we saw in this latest earnings season.
That this lift had a lot to do with a resurgence in the energy sector is important in the context that Factset says around 70% of those companies which have provided guidance for the second quarter have given negative guidance.
And throw in the fact that US data is not playing to the Fed's script right now with continuous underperformance to expectations dropping the Citibank Economic surprise index close to 40 once again overnight.
It's clear this rally in stocks has plenty of challenges. And that's before I mention valuations relative to history and other such indicators. Nor have I mentioned the divergence in the performance of stocks with more than 50% of their earnings offshore relative to those that were seen to benefit from the very Trump trade that the data and sentiment has undermined. And then, of course, we have the potential for political upheaval which caused last week's dip.
Yet prices won't fall sustainably and buyers reenter on dips.
And that, I think Dennis Gartman would say, means this is a bull market.
That is when a market does not react to bearish stimuli then it is not a bear market.
That said when I look at the charts of the Dow Jones Industrial Average and S&P 500 they both look like the consolidation of gains is not over yet.
Regular readers know I believe a significant top from the 2009 lows is likely to be formed by the S&P 500 in the 2400/2400 region. And it must be said I pre-emptively called for the Dow to fall back below 20,000 a few weeks back as well.
I got that one wrong.
But when I look at this chart of the Dow I continue to see a market that is topping. Unless it can take out the record high on a closing basis I retain that view. A break of 20,522 would be a sign a move to the 38.2% level at 19,733 is on the cards.
Looking at the S&P though it retains support - as they both do really - and while it stays above the mid bolly band the upside may not be done yet. Indeed last week's low of 2344 - in CFD terms - was just above the mid bolly band region.
So we'd have to see that low taken out to signal the top is in.
Unless or until this level in the S&P and the level identified in the Dow give way I remain alert but not preemptive.
After all if prices won't go down with all the risks that abound then the price action is sending a clear signal of traders intent.
Have a great day's trading.