Why this rally to all-time highs was obvious

Free After-Hours Update:

The S&P 500 finished Tuesday higher for the fourth time in a row and is at the highest levels in six months, just a few points shy of all-time highs. While traders lived in fear of Trump’s trade war and the Fed’s rate-hikes, the market’s done nothing but climb higher.

Regular readers of this blog know we trade the market, not headlines. This market’s strength has been obvious to us for a while. I could quote any of my blog posts from the last six months, but I’ll save regular readers the repetition and invite new readers to browse my archive.

That said, at times even I was caught off guard by just how resilient this market has been. Last week it looked like we were on the verge of tumbling under 2,800 support, but that was yet again another false alarm. But rather than argue with this strength, we should embrace it. It has been a very profitable ride for anyone that understood why the market was acting the way it was.

Often it is more insightful to look at what the market isn’t doing than what it is doing. For months this market refused to breakdown no matter how ugly the headlines got. There are few things more bullish than a market that refuses to go down on bad news and that is exactly what happened here. While the cynics are dumbfounded we are within a few points of all-time highs, those of us that knew what was going on saw this coming from a mile away.

Of course that was then and this is now. Let’s not forget we are still in the slower summer months and institutional managers won’t return from their summer cottages until after Labor Day. Without big money’s deep pockets, we should expect these directional moves to run out of steam fairly quickly. Prices rebounded from 2,600 and paused at 2,700. When we finally broke away from 2,700, we stopped at 2,800. And now that we are approaching all-time highs near 2,880, we should expect yet another pause. The only question is if we trade sideways for a bit before breaking out. Or if we dip back into the mid-2,700s before launching the next leg of this bull market.

Either way, this is a better place to be taking profits than adding new money. The most profitable trade since February’s bottom has been buying weakness and selling strength. Nothing has changed and that means this week’s strength is a better selling opportunity than buying one. Even though everyone feels a lot better because we are no longer on the “verge of collapse”, the lack of fear and recent price gains actually make this a far more risky place to buy than last week’s fearful dip under 2,800 support.

Everything looks good and we should keep doing what has been working all summer long. For our longer-term investments, that means sticking with our favorite buy-and-hold investments. For our short-term trading positions, we need to shift our mindset from offense to defense and start thinking about locking-in profits as we run into overhead resistance near 2,880. If prices dip and retreat back into the mid to lower 2,800s, that is simply giving us another profitable dip to buy. If we trade sideways for a few weeks, then we jump back in ahead of this fall’s next bull leg higher. Either way this market isn’t going anywhere fast and we don’t need to worry about being left behind.

Despite brief scares in FB and NFLX, the tech trade is still very much alive. While I cannot say it is well given the beatings FB and NFLX took last week, it looks like both stocks have bottomed and are starting their recovery. People who miss a big trade always pray for a pullback so they can jump aboard, unfortunately most of those people lose their nerve when the market finally answers their prayers. If someone wanted to buy FB and NFLX at discounted prices, they better move because those discounts are disappearing pretty quick. At this point the biggest risk to FAANG stocks is broad market weakness. As long as the indexes continue trading well, expect FAANG to keep leading the way higher.

It is hard to find anything positive to say about Bitcoin. Last week’s bounce above $8k support failed and rather than break the destructive trend of lower-highs, it looks like we made another one. Failing to hold $8k, it didn’t take long for us to crash under $7k as any hope brought about by the latest rebound vanished faster than it appeared. If we cannot retake $8k support over the next few days, expect us to tumble through $6k support and start making new lows. This is still a very broken chart and Bitcoin is guilty until it proves itself innocent. So far it hasn’t managed to that.

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Jani

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