There are lots of fundamental reasons to think stocks can't go higher, and very few to believe that they should.
It is times like this when I simply rely on price to tell me what's going on and what the path of least resistance is. It's also good to remember that Mr. Market will indeed "fool the most" investors and traders, never making it easy to time the short term swings, nor to catch the next big trend.
Below are 5 price charts which tell the tale of a broad market about to go higher. There could be a dip first, but this is actually what lots of nervous bears and timid bulls are waiting for so they can cover their shorts or get long.
And because so many want that dip, we may not even get it. As my first chart of the S&P 500 shows, this market may be merely consolidating before it surges to new highs. And the dip into support around 1375 will very likely be contained above 1360.
Next up are three views of indexes that were part of my arguments last month for staying bearish. Guess what? They are all looking fairly positive now.
The first is the S&P 500 Equal Weight Index, which has not only survived what looked like heavy pressure to fall below its 50 and 200-day moving average "death cross," it is sustaining new 3-month highs above its 2020-40 resistance zone.
And here is the NYSE Composite Index, also trying to survive a much earlier and deeper "death cross." Now the NYA is holding strong above the key 7900 level.
Last among the weak indexes is the Russell 2000. Small caps have suffered a loss of love as money poured into big caps for safety and yield in the last few months. But in the last month, the RUT found good support at 765 (while the S&P was testing 1330 one last time) and sitting above 785 is fairly bullish for this index, even though it has to prove itself by taking out 820.
Finally, here is one of my favorite "breadth" indicators, the Bullish Percent Index on the S&P. This is created by measuring the number of SPX stocks on Point & Figure "buy" signals. Now that the BPI has surged above the 62 resistance area, it will likely keep getting stronger.
This is what we call an "internal view" of the market. It is telling you how many stocks are strong versus how many are weak. Because the percentage is rising, it's a good sign that the rally will no longer be dominated by a hundred or so big cap stocks.
What About the VIX and the BIG Death Cross?
Many traders look at the VIX below 16 and think it's a sign of complacency which means stocks are vulnerable. But this isn't like the correction indicator view we had in the spring.
What's different is that back then in March, while the spot VIX was at 15, the VIX futures curve was very steep, with the April, May, and July contracts at 22, 24, and 26 respectively.
But today, the next few months of VIX prices are sloping only gently higher from 17 to 21. There is no fear premium anymore because the majority of big players are behaving as if the market correction is officially over.
Then there's the much touted "death cross" of all time, the bearish convergence of the 50 and 200-month moving averages on the S&P 500. Anybody who has been making investing or trading decisions based off of this is missing the fact that this is a huge ship turning here.
What I mean is that while it is quite possible that this "indicator" -- which still hasn't crossed precisely with the 50-month at 1155 and the 200-month at 1149 -- is telling us a bigger bear market is coming, it may not unfold for another year.
What is also possible is that the market rallies to S&P 1500 first and then rolls over. Or, the market keeps on going and these two moving averages merely kiss and then spread apart again.
The point is that when you are looking at 50/200 crosses on such a long-term chart, it doesn't have the same sort of predictive value about trend that it might in smaller time frames. It took a decade or so for this price data to form, so it's not telling you about anything urgent happening in the next year.
The fact we are even having this discussion about the 50/200-month nonsense must mean that the market is in a giant, generational trading range consolidation. And so a much better question to ask is this...
"Is the market going to break out of this decade long trading range between S&P 700 and 1500 or is it going to stay within it?"
Fool the Most
Here's what I said to my Tactical Trader subscribers a few days ago...
As many of you know, this is my short phrase to describe what Mr. Market will always do. Try as we might to decipher his next move from the psychology of the charts, Mr. Market will always "fool the most" investors and traders. Look at all the smart bears (and me) who are capitulating to the recent price strength.
Doug Kass, Charles Biderman, and Louis Moore Bacon are just three smart, experienced cookies who have either admitted, or are about to admit, that this market isn't doing what they thought it should do -- namely, go down.
So what would "fool the most" now? Oh, a quick 1% head-fake one direction and then a 2-3% move in the other... right before the real 5-10% move. My guess is 1% up to S&P 1415, then back down 1375ish, then new highs on the year by November. The swings could be deeper, but the basic idea is that the bears get flushed out soon, then they pile back in when they see a 1370 handle, and then get their butts kicked on a powerful rally.
That would fool the most as weak longs get confused and whipsawed too. For now, we will watch and wait for the prime opportunities to strike.
This is my playbook going into what will likely be a sleepy August vacation season for Wall Street. Will you be buying the dips? I will.
Kevin Cook is a Senior Stock Strategist with Zacks.com