After spending most of February and March consolidation between 3,900 and 4k, the S&P 500 finally broke out and launched itself nearly 5% in just two weeks.
Coil…spring…coil again…spring again…
So far everything is going according to plan. That said, 5% in two weeks is steep even for the most bullish of markets. That means at the very least, we should expect the rate of gains to slow down over the near term.
Expecting a slowdown doesn’t mean I’m bearish, just that I’m realistic and have been around the block a few times. Two steps forward, one step back.
That said, we don’t need to bail out of this market until the next dip actually starts. Keep holding for higher prices as long as the index remains above our stops in the upper 4k’s/lower 4,100s. Just because another 5% move is unlikely doesn’t mean it is impossible.
Savvy traders let the market tell us when it is time to lock in profits and so far this one isn’t signaling us yet. The biggest warning sign of faltering demand will be a couple of fizzles into the close. That is a good sign to lock in some profits proactively and we don’t need to wait for the market to hit our stops.
If there is one warning sign of a looming slowdown, it is the lethargic behavior of the FAANG stocks this week. These best-of-the-best stocks helped launch the 4k breakout, but these same stocks lagged behind badly this week.
If they get their act together next week and start outperforming again, all is forgiven and forgotten. But if their underperformance continues next week, expect this to weigh on the entire market and the near-term consolidation/pullback is upon us.
As we saw in February and March, the index cannot rally without the biggest stocks participating.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.