I believe it's the former. Thursday's selloff after the June Employment report was a bit scary, particularly if you're only looking at the magnitude of the point losses. But, in my opinion, no key support levels have been violated. That means the beginning of next week will be worth watching. We have been in the midst of an uptrend for the last few months and we are still in it. We have a series of higher highs and higher lows off the March lows that has not been broken - yet. Therefore, I say we play the trend at hand, which still is higher.
There were plenty of warning signs recently as to a short-term top - VIX hitting support, negative divergences on the daily MACD across the major indices, overbought conditions, light volume on early June highs, lack of participation from key sectors that led the rally since March, like financials and consumer discretionary stocks. Those warning signs did, in fact, lead to a short-term top.
This begs the question - is the bullish move off the March lows over? To be honest, that's a tough call. I'd place about a 60-40 chance on the major indices putting in higher highs during July. If it happens, it will most likely happen within the next two weeks as historical indications tell me that this period is the strongest in July, except for perhaps the last couple trading days of the month. Once we get past mid-July, all bets are off as we enter the third most bearish period historically in the market. Dating back to 1950, there's a one week period in July, just past the mid-point, where the S&P 500 has produced annualized LOSSES of 36%. That trails only bearish periods in September and October.
The market has a lot of reasons over the next few months to sell off. Historically, the worst time period of the year is from mid-July to late-September. Since 1998, the S&P 500 has gained more than 1.5% during this period only once - in 2006. On the flip side, we've seen losses in the range of 5%-16% during 5 different years. Clearly, the historical trend has been towards losses during these summer months.
I can make a solid case for both bulls and bears, which is why it will be difficult to trade near-term. If you're right, you can make some nice money. But with the risk/reward up in the air, doing too much makes little sense at this time. First, here are a couple charts that are quite bullish in my opinion:
On the bears side is the following:
For the very near-term, I'm buying the bulls argument (but not aggressively so) and will remain on the long side. If key price support levels (primarily May lows) fail to hold, I'll grow much more cautious. Further out, I'm a student of history and I tend not to argue with trends that stand the test of time. Therefore, I'll remain cautious throughout the remainder of the summer, looking only for the best opportunities in terms of risk/reward. You can click here to review our alert performance over the past several months.
Those who are ultra-conservative should probably be sitting in cash at the moment or long with one finger on the sell button. Enjoy the holiday weekend!