Near all-time highs, what happens next

End of Day Analysis:

The S&P500 stalled at 2,400 resistance Thursday, ending an impressive streak of gains that kicked off the week. Investors cheered the positive result from the French elections, but after the initial euphoria faded, there wasn’t enough substance behind the headlines to justify buying above recent highs.

As I wrote in Tuesday’s free blog post “the thing about “not-bad” news (the French elections) is it doesn’t do anything to improve corporate earnings in the U.S. We experienced a brief period of relief this week when we avoided a worst-case scenario, but now that we traversed those waters, we are largely left where we were a couple of weeks ago. We remain near the highs as hope for tax and regulatory reform remains high, but we are still waiting for Trump and the GOP to deliver on those promises. We couldn’t break through 2,400 in March and not much has changed since then.” And up to this point, the market is reacting exactly as I expected.

Now that we are at the upper end of the trading range, we need something new to keep this going. The Trump administration unveiled “the biggest tax cut in U.S. history”, but the market didn’t react because there is zero chance he will get this by Democrats and fiscally conservative Republicans. While 15% tax rates make a great soundbite, he might as well be promising the moon because neither one is going to happen.

Right now the market is trading in opposite world. Meaning it does the opposite of what conventional wisdom says it should do. Rather than selling a violation of support, we should buy it. Instead of buying the breakout, we sell it. When it feels like the market is about to collapse, buy. If everything is right in the world, sell.

The reason traditional rules do not work is because the wider crowd of investors is not joining these directional moves. Overactive day-traders jump from one extreme to the other and cause these daily gyrations, but when the wider group of investors doesn’t join in, the move fails and reverses. As long as the larger group of bulls and bears remain stubbornly attached to their outlook, we shouldn’t expect these directional moves to take hold. Instead, keep buying weakness and selling strength.

Currently we are at the upper end of the trading range, meaning this is a better place to be taking profits than adding new positions. The longer we hold near these highs, the more likely it is we will break through 2,400 resistance, but without a substantive headline driving the breakout, expect the buying to fizzle and prices to tumble back into the heart of the trading range. At this point the only thing that will support sustainable breakout is the GOP getting their act together and coming up with a passable tax plan. Until then expect us to stay in this trading range and keep selling strength and buying weakness.

Jani