New highs, but are we overheated?

My own stock portfolio made a new all-time high last week.  Naturally, I'm pleased about that, but it also makes me wary, because that often means a correction or consolidation is imminent.  So let's look at some charts and see what we can see.

DISCLAIMER:  This post, and all other posts of this sort, are for entertainment only.  They are not to be construed as personalized investment advice.  If you want personal investment advice, hire a financial advisor.

First, the S&P 500:

 

 

As you can see, we have not only completely recovered from early April's "tariff crash" and broken through the 50-day moving average to the upside, but we smashed right through the 200-day average, too.  This is a solidly bullish signal.  If the 50-DMA crosses over the 200-DMA to the upside while the S&P is above both, then we should be off to the races.  Hello, summertime bull market!  :D

But let's hold our horses for a moment.  There's a gap up around May 12th, and the old trader's axiom is that gaps want to be filled.  That space between about 5680 and 5800 is pulling like a magnet.  The 200-DMA will act as support, though, so you've got opposing forces at work here.  However, that gap exists on this chart, but it's not on the equally weighed version of the S&P:

So, because the gap is largely the result of the Mag-7 stocks, I think that gap might not get filled even if there's a pullback this week.  I think the rest of the market will keep the index buoyed.  Let's see if the transports support this theory.

 

 

There's a gap there, but that gap can be filled without breaking the 50-DMA support line.  I think that support will hold, and I think that will keep the market consolidation from dipping too far down.

And I think there will be a pullback this week--or, at latest, next week--due to the oscillators.  The RSI on the first chart is at 69.76, just a quarter of a point below "overbought" level, and the MACD is not only up but has had a wide signal line spread for a while now.

While we're looking at charts, let's check out the VIX:

 

The last time the VIX bounced off a bottom, it did it at around 17, and that's where we're at right now.  In the few months prior, the VIX bounced at around 15.  So I'd look at 15 as the next place the VIX will bottom out, though it's also possible it has already bottomed out and will head higher in the next session.

Conclusion:  I think the likeliest course is for there to be a consolidation over the next few weeks starting when the VIX touches 15 if not before, and then when we get the 50/200 crossover, we go to the moon in a summertime bull market of surprising strength.

Naturally, there are lots of ways we can get derailed from this course.  If India and Pakistan decide to nuke each other, for example, that might cause a bit of a kerfuffle in financial markets.  But barring any such news events, what I've outlined is what I think is the most likely outcome.

Surprising market strength

Stocks finished up after Friday's session, but that's not the surprise, at least not for me.  What surprised me was the strength in the Dow transports.  That index closed at its highest level since early April.  It's now getting close to the 50-dma curve faster than I anticipated.

 

 

Here's something to keep in mind: there's a meeting of the Fed next week.  If there's going to be a rate cut, they'll announce it Wednesday.  Are we seeing some traders betting on a rate cut by buying in the days prior?  I don't know, but it's a possibility.

The real test will be the 200-dma.  If the transports can break through that in the next few weeks, then I suspect the market will be off to the races.  We'll have a bull-market summer, an oddity but not unheard of.  An interest rate cut would probably be sufficient to make that happen.

The calm after the storm

DISCLAIMER:  This blog post, and any other blog post of this sort, is for entertainment purposes only.  It should not be construed as personal investment advice.  If you want personal investment advice, hire a financial advisor.

 

Early April saw some wild action in the stock market, but things seem to have calmed down in recent trading sessions.  Will they remain calm through May?  Has the market already bottomed out?  Or is there more trouble on the horizon?

Well, I can't answer those questions definitively, but I can take a look at the data and see what's what.  So let's do that now. 

First, let's look at the last few weeks of the S&P 500 chart.

 

 

As you can see, the MACD at the bottom is seeing some significant spread between the main line and the signal line.  This often indicates an impending reversal (as you can see happened previously around April 7-8).  The RSI at the top is higher than it's been in several weeks, but it's only at 56, so it's not in overbought territory yet, so that indicator isn't really telling us much right now.  The most interesting thing about this chart is the last candle: it traded above the 50-day moving average.  It's still close to it, though, so I wouldn't go so far as to call this "broken resistance."  It will have to stay above the blue curve for a few days before I can make that call.  Also, the candle gapped up, and as the old trader's axiom goes, gaps want to be filled.  I wouldn't be surprised to see Friday's candle filling the gap and straddling the 50-dma curve.

Now let's look at the equally weighted version of the S&P:

 

 

Here we see a very similar situation as in the previous chart.  RSI and MACD are basically the same.  There's an important difference, though, and that's the last candle.  It bumped into the 50-day moving average, and the resistance held.

Let's look at the small-cap index:

 

 

Basically the same as the chart above it.  We can conclude from those three charts that a handful of mega-cap stocks are seeing the biggest gains in this recent upswing in the market.  The rest are doing okay but are trailing behind the mega-caps.

Now let's look at the Dow Transports.

 

Uh-oh.  This index is obviously performing the worst of the four.  The most recent candle is still well shy of the 50-day moving average.  The RSI is below 50.  There's really nothing bullish about this chart at all, at least not as far as I can see.

So what can we conclude from all this?  Well, the mega-caps will probably continue to outperform the broader market, but the other stocks are stagnating.  When the transport index gets close to its 50-dma, something will have to give, and then we'll have a better idea.  On the whole, though, I think the next leg up or down is more likely to be down.

Keep an eye on the VIX:

 

 

Last time the VIX hit the 200-day moving average, that proved to be a support line for that indicator and a top in the market.  If the VIX gets close to that red curve, it might be signaling another top and the start of a new leg down.

So those are the two things I intend to watch: the proximity of the VIX to its 200-dma, and the proximity of the Transport index to its 50-dma.  If nothing spooks the market beforehand--which is kind of a tall order, in my opinion, because of all the crazy things going on in the world right now--then look to those two convergences as indicators of a breakout to one side or another.