The bull that refuses to die

End of Day Update:

The S&P500 only closed higher by 0.12%, but that was enough to hit a new record close. Gains have been slow, but steady. There was no meaningful news driving today’s strength, simply a continuation of the recent drift higher. Given how ominous the last several weeks have been, at this point no news is good news. As I’ve been saying for a while, a market that refuses to go down will eventually go up.

It’s been several days since a North Korea headline hit the front page, but even if it did, the market has grown immune to those headlines and it will take something spectacular to dent this rally. Anyone who was afraid of North Korea sold weeks ago. When there is no one left to sell the news, it stops mattering.

The GOP released its tax reform proposal and the market is cautiously optimistic. Given how poorly Republicans handled healthcare, most traders are taking a cynical approach to tax reform. I suspect something will pass eventually, but it will look far different than what was proposed. But at this point anything is a positive since the stock market has largely given up on tax cuts. The easiest way to see the lack of hope is how little the stock market reacted to healthcare’s defeat. The market barely flinched at Trump’s and the Republican’s political humiliation. If traders had high expectations for tax reform, we would have seen a much bigger reaction to the Republican’s inability to get anything accomplished.

Volumes have been average or above since Labor Day. Big money finally returned from vacation and is getting back to work. It is encouraging to see they are more inclined to buy this strength than sell it. Fragile and vulnerable markets tumble quickly. Sticking near the psychologically significant 2,500 level for nearly three-weeks tells us the foundation under our feet is solid.

Earlier in the week we dipped under support, but rather than sell this technical violation, many traders rushed in to buy the dip. Ignore what the bears are saying, this market is healthy and poised to continue higher. August’s basing pattern refreshed the market by chasing off weak owners and replacing them with confident dip buyers. Given how long we have been holding near the highs tells us few owners are taking profits and most are confidently waiting for higher prices. As long as confident owners keep supply tight, expect the drift higher to continue.

August’s 2% pullback was quick and shallow. The market likes symmetry and as a result the subsequent rebound has also been equally unspectacular. There is nothing wrong with that, but it also isn’t a surprise or a concern how slow the breakout has been. Recent sellers are still nervous and it will take a little longer before they conceded selling last month was a mistake and buy back in. But few things calm nerves like rising prices and soon the fear of losses will be replaced by fear of being left behind.

Expect the gains to be slow and choppy over the near term, but soon underweight money managers are going to give up waiting for a larger pullback. Their chasing prices higher will give the market a boost in the final months of 2017. As long as the gains are slow and steady, they will be sustainable. I will get a lot more defensive if the rate of gains ramp up. A good opportunity to take profits could be following a pop on a tax reform agreement.

Expect these daily gyrations to continue, but the path of least resistance remains higher. Stick with what has been working and that is buy-and-hold and adding on dips.

Jani

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