Here’s the Lesson…
Yesterday I pointed out that there had been multiple days of a steady climb from early day sell-offs and this is a sign that there’s cash out there ready to get put to work. Any time you see a market (any market) in a longer term uptrend that ignores early morning pullbacks sprinkled in with bad news which then rallies higher, you can usually expect to see a large move to the upside quickly follow. This is exactly what occurred yesterday.
Here’s the lesson: There’s a behavioral component behind this. When trading desks at large institutions see the market reverse two days in a row from down back to even/slightly higher, they know that there are buyers out there. This message basically tells them they need to work their buy orders faster; they’re likely not going to see better prices than this. This is how yesterday played out and it’s now taken the market back to overbought territory. New highs and still lots of cash out there is where are today.
The main concern comes from the Federal Reserve’s concern. They publicly acknowledged this week that there is too much complacency in equines and especially in bonds. If you look at the yield spread between treasuries and high yield, they are at the levels last seen in mid-2007. I do believe that somewhere here the Fed is going to allow prices to correct themselves. This means a correction and possibly a healthy correction without them stepping in. Longer-term this would be a healthy move.
As you know, I do not pick tops in bull markets. It’s a well-known fools game that most professional know best to avoid. Exactly when a correction occurs is unknown. We know it will happen. As the pullback occurs, we’ll do our best to analyze each to see if it’s out of the ordinary and if it’s potentially occurring because the Fed is not there. Until then, the longer term trend remains higher as we have discussed here since 2012. Please do not attempt to trade indexes on the short side. Let the pullbacks occur and we’ll trade them appropriately on the long side. As you see from the track record of the Daily Battle Plan Model Portfolio, it’s a successful formula many years now.
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