The stock market remains exceptionally strong as the major averages continue to “melt-up.” Over the last few weeks we saw a lot of “action” from global central banks. In late October the U.S. Fed ended QE 3 (but interest rates are still at zero so they are still in the easy money camp). Then, almost instantly, two major global central banks (Bank of Japan and the European Central Bank) jumped on the easy money band-wagon and announced more aggressive measures to stimulate their lackluster economies. The fact that other global central banks are printing gobs of money every day to stimulate markets has helped the benchmark S&P 500 (SPX) hit fresh record highs!
Overbought Can Become More “Overbought”
To be clear, the stock market is very extended right now and a light volume pullback into support (2020 and then 1970) would do wonders to help the market consolidate this very strong rally. Remember, the S&P 500 was trading like a penny stock in October (which typically ends poorly). In the first two weeks of October, the SPX plunged -8% and then turned higher on Oct 15 and soared a whopping +12% in 3.5 weeks. That is a huge move (both up and down) and that type of volatility after a big move (the bull market is now 5.5 years old) typically does not end well. Remember, in a non-QE world, a 10% annual gain was considered healthy. So 12% in only three weeks is abnormal (to put it nicely) and very impressive.
Don’t Fight The Fed
There is an old adage on Wall Street that says, Don’t Fight The Fed. This has been very true and remains true today as this adgage has now shifted to: Don’t Fight Global Central Banks (Not just the Fed). It is important to keep mind that since the historic March 2009 bottom, the SPX soared when QE has been in effect and fell -17% when QE 1 ended and fell -22% when QE 2 ended. The Fed ended QE 3 at the end of October but the market did not fall (yet). The reason is because the QE trade has evolved and other Central Banks are still aggressively printing money to stimulate the global economy and help risk assets rally (risk assets is a fancy name for stocks). In the short term, the market is extended and we want to see it pullback a little before heading higher.
A Look Under The Market’s Hood
I like to look at how several sectors are performing for a better gauge of the underlying “health” of the market. My favorite sectors vary depending on two facts: where capital is flowing at any given moment and where are we in the economic cycle. Right now, the vast majority of sectors that are on my radar continue to race higher which bodes well for this very strong bull market. A quick look at Financials (XLF), Retailers (XRT), Housing (XHB), Transports (IYT), and Healthcare (XLV) & Biotechs (IBB) continue to lead the market higher. That is why from where I sit, the short, intermediate and long term trend of this market remains up until further notice. If you want specific buy and sell signals in leading stocks, consider joining MidasWave.com.
