I love a good bull market as much as anyone. And I don’t like to fight the trend. So if the stock market – having bounced off of an oversold situation recently – wants to burst forth to new highs I for one will not be a naysayer.
OK, let me amend that. I might be a naysayer, but I won’t fight the trend.
Wait, let me amend that. I might be a naysayer and I won’t fight the trend, but I might consider hedging my bets depending upon what happens next.
Stuff Naysayers Say
Following the selloff in late June, early July, the stock market – particularly the NASDAQ – has rallied sharply. In fact the Nasdaq – powered by the “cool stocks” like Google (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX) – has gone pretty much vertical during this recent advance. But there are a few concerns, to wit:
*As you can see in Figure 1, the Nasdaq (represented by ETF ticker (NASDAQ:QQQ) is the only major index that has broken out (so far) to a new high. This doesn’t mean that other won’t follow suit. But until they do the whole thing feels a little “iffy”.
(click to enlarge)
Figure 1 – Nasdaq at new highs; Others…not so much (at least not yet); Courtesy: www.ProfitSource.com)
*Another yellow flag occurs when an index goes up but the majority of stocks do not. In Figure 2 you can see that on 7/20 the Nasdaq 100 registered its 8th consecutive up day. However, note the Advance/Decline and New High/New Low numbers for the overall Nasdaq on the same day – i.e., both are “underwater.”
Figure 2 – The index is “Up”, the majority of stock are not
Two important things to note regarding this divergence between index price and market action:
*A one day reading like this is not “the end of the world” nor is it a clear sign of “The Top”.
*At the same time, it is not a positive sign.
What’s a Bull To Do?
If you are in the stock market you have several choices at this point, including:
1) Do nothing.
2) Do nothing but worry a lot.
3) Sell everything.
4) Keep a close eye on whether SPY, RUT and VTI follow the lead of QQQ…..or vice versa.
Sure, human nature being what it is, most people will gravitate to #’s 1 and 2, but I am going to go ahead and suggest #4.
Summary
I wrote recently about an impending confluence of potentially favorable seasonal trends. On that basis – and since it is a pre-election year – I “want to believe” in the bull and to give the bullish trend the benefit of the doubt. So hopefully, (ARCA:SPY), Russell and (ARCA:VTI) breakout to the upside and away we go.
But if the don’t – and especially if QQQ drops back below the red line drawn on Figure 1 – at the very least a bit of hedging may well be in order.