The Inevitable Breakout

End of Day Update:

The S&P500 closed above 2,300 for the first time ever on Thursday. We started consolidating under this psychologically significant level in early December, but it’s taken us this long to find the demand necessary to push on through. While it’s been a long time coming, it shouldn’t be a surprise for anyone who has been reading this blog. As I said many times over the last several weeks, the longer we hold near the highs, the more likely it is we will break through. We tumble from unsustainable levels quickly and holding on this long told us the market wanted to go higher, not lower.

But now that we’re up here, the bigger question is what happens next. While I think the path of least resistance remains higher as we squeeze shorts and suck in breakout buyers, tepid demand continues to be a real obstacle for this bull market. No doubt we will get some recent profit-takers to jump back in when 2,300 resistance turns into support, but so much optimism has been priced into since Trump’s election that it is getting harder and harder for this market to exceed expectations. Even though momentum will keep us drifting higher over the near-term, this is a better place to be taking profits than initiating new longs. While cashing in over the next few days is a prudent move to make, going outright short creates a far different risk/reward. Even though this strength leaves us vulnerable to the unexpected, we need that unexpected event to happen first. It is far too dangerous to short for no other reason than “we are due for a pullback”. Just ask all the shorts that were crawling over each other to get out this afternoon when we smashed through their stop-loss levels.

There isn’t a lot more to add since this is such a benign market. Emotion is practically nonexistent, meaning there is not a lot of force behind these moves in either direction. Last week we saw a modest retreat from the highs the first time we tried to break 2,300. Now that we finally broke through, expect an equally lethargic breakout. Momentum is higher, but this thing is moving so slow we don’t need to chase it. If you are not already in the market, wait for a better trade. The hardest thing for a trader to do is not trade, but often that is the best move to make.

Jani

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