The S&P 500 treaded water Thursday, but given Wednesday’s negative price-action, doing nothing was actually a win for bulls.
On Wednesday an early surge to record highs fizzled and we tumbled into the red. Normally a reversal from record highs signals a lack of demand and is a great short entry. Unfortunately this isn’t a normal market and we cannot rely on traditional trading signals.
Ever since Trump’s election, confident owners have refused to sell every negative headline and any bearish price-action. Conventional wisdom tells us complacent markets are vulnerable to a collapse. What conventional wisdom fails to mention is periods of complacency often last far longer than even the bulls expect. Confident owners don’t sell and that keeps supply tight. It is hard to get a selloff started without sellers and is why it has been ages since any dip went more than a handful of points lower.
This is most definitely not a normal market and Wednesday’s negative price-action should have been ignored. Thursday’s flat trade confirmed Wednesday’s selloff was yet another false alarm. In one-way markets we keep doing what is working and here that is sticking with our favorite buy-and-hold positions.
That said, this is the riskiest period for stocks in nine years. Risk if a function of height and these record highs mean the risks have never been greater. Everyone loves a market that goes up, but this buy-and-hold-no-matter-what attitude is going to backfire spectacularly at some point over the next 6 to 24 months. Hold all the way up, hold all the way down is the way this works for most investors. But for those of us paying attention, it doesn’t have to end this way. Enjoy this rally higher over the near-term, but stay alert and keep close to the exits. This market has never been closer to topping. Trading is most definitely not easy and without a doubt the market will remind everyone when they least expect it.
Currently the stock market is cheering the falling dollar because it makes domestic producers more competitive. What the market is ignoring is the U.S. is a net importer and consumer based economy. A falling dollar means prices in Walmart (NYSE:WMT) will go up and that erodes household purchasing power. There is most definitely a half-empty side to a weak dollar and the surge in oil prices is just the start. Add in the Fed’s expected rate hikes and that very well could be the recipe for our next recession. It will take a while for these macro-economic effects to be felt, but it is most definitely something worth paying attention to.
While everything feels great, the thing to remember is the top of every bull market always feels great. Over the near-term the market is acting well enough to stick with it. But the key to surviving the next downturn is seeing it before everyone else does.