Trading Outlook for Wednesday, July 20th

End of Day Update:

The S&P500 slipped a negligible amount Tuesday in one of the lowest volume sessions of the year. To this point stocks are holding the recent breakout as they trade in a tight range between 2,155 and 2,170. Quite a reversal in fortune from the turmoil and uncertainty we faced earlier in the year. The biggest question on everyone’s mind is if these record highs are the real deal, or these are the last gasps before the crash.

Last year many bull market skeptics claimed they would have a lot more confidence in this rally if we pulled back and refreshed. Many were quoting how many months it’s been since we had an X% pullback. Since then we’ve had two dramatic selloffs, the first occurring last fall and an even more dramatic one this winter. Now that we checked that box and reset the clock, have we won over the skeptics? No of course not. But now they have to be more creative when coming up with a reason to disbelieve this strength.

For years I’ve been firmly in the secular bull camp. Over the last 100-years, “lost decades” have been followed by monstrous secular bull markets lasting a dozen or more years. That makes this seven-year old bull market relatively young in comparison. That said, secular bull markets contain brutal and terrifying selloffs. The infamous Monday in 1987 where stocks lost over 20% in one day was inside a phenomenally profitable, two-decade long bull market. This bull market will die like every one that has come before it, just don’t expect it to rollover any time soon.

But that is the big picture and mostly applicable to long-term, buy and hold investors. Those of us with shorter timeframes can look at this 150-point rebound from the Brexit lows with a more cynical eye. Even in powerful up-trends, we experience the inevitable (and healthy) step-backs.  Having moved as far as we have over the last few weeks, it is little surprise we ran out of buyers willing to chase prices higher. But even though we are struggling to find new buyers, stock owners are confidently hanging on for higher prices. Even without strong demand, prices are holding up well because so few owners are selling stocks. When supply is tight, it doesn’t take much demand to keep us levitating near record highs.

At this point it seems many traders are watching 2,155 and 2,170 levels and waiting for prices to breach either of these benchmarks before making their next move. A wave of profit taking will hit us if we slip under 2,155 and jumping above 2,170 will trigger the next round of chasing. But since we remain in the low-volume summer months, we shouldn’t expect either of these moves to get too carried away. The breakout will likely stall near 2,200 while a dip would most likely bounce before testing 2,100 support.

Even though we broke out to all-time highs, for short-term traders we are better off trading against these moves. That means buying weakness and selling strength. The sustainable buying won’t officially begin until big money managers return from their summer vacations this fall.

Jani

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