The stock market looks overbought on virtually every technical measure we can think of, but an overbought condition doesn’t always mean the market is vulnerable. To the contrary, we’ve found that “initial” overbought readings—like the one triggered last week on the S&P 500’s 14-Week Relative Strength Index—are generally followed by above-average gains in the intermediate-term (Chart).
While the sequence of index peaks traced out YTD is not exactly a textbook one, the market’s internal diffusion is comparable to that seen at many major tops, including 2000 and 2007.
Up front, we need to remind readers that the Major Trend Index is bullish at 1.08, and our tactical funds remain well-exposed to equities with net exposure of 60-61% (versus a range of between 30% minimum up to a maximum of 70%). That being said, we’re focused on the likelihood of a major defensive portfolio move in the near future, which probably comes as no surprise to Green Book readers (...what with us publishing a prepackaged obituary for the bull market just a month ago).
The S&P 500 made a cycle high on December 29th, and in early February mounted another assault on that level. Ignoring valuations, the economy, Europe, etc. (not necessarily our recommendation), the most bullish observations we can make about the stock market are: (1) its peak is still recent; and (2) the S&P 500 had significant company at that peak—including the Transportation stocks, Utilities, Russell 2000, S&P 500 Financials, and even the NYSE Daily Advance/Decline. All in all, this action is broad enough that a final top shouldn’t be imminent.
We examine Emerging Markets from both the top-down and bottom-up perspectives as we try to identify where to move and what to expect. We check in on two successful EM thematic group ideas as well.
Give those who’ve advised investors to “Sell In May” over the years some credit: they’ve never been too specific.
Whether it’s the start of a new bond bear market or not, there’s no need to rush... and why shorting bonds may not be the best idea, even during a bond bear market.