While momentum in stocks continues to be less impressive than I’d like it to be, our friend Super Mario was able to break through the overhead ceiling of resistance described in last week’s update on the state of the market.  This week, we observed a breakout above an important level, defined by the October, November, December, and March highs.  Now the question is, “Will stocks hold above this line in the sand through next week’s market action?”  Let’s take a look at the evidence…

Before we observe the bad evidence, let’s take a minute to reflect on the positive developments that have occurred since the -20% decline in the 4th quarter of 2018.  The market put on a show, launching upward in an unprecedented bounce higher without any pullback whatsoever, and in only 45 days, the S&P500 was able to recapture losses that took twice as long to develop.

Last week, I shared that “Super Mario” persistently tried (and failed) to break through the brick ceiling of potential resistance from the Oct/Nov/Dec/March highs.  This week, Mario jumped hard enough and the market broke out above those important levels.  As you can see in the chart below, there is a clear breakout above the red-dashed line, followed by a few additional days where the market was able to close (and remain) above it.  Even after the Fed meeting, we saw stocks make a big positive move on Thursday (as observed by the last large, empty/positive candlestick) as the market tries to finish the week strong.

One of my concerns continues to be the weak momentum, however.  After such a swift move off the December lows, I would’ve liked to see momentum (in the lower pane) rise above 70, indicating the move was truly healthy in the longer-term.  Furthermore, I would’ve also liked to see momentum move higher after this second move higher (above the red-dashed line) after the pullback in early March… but still, it can’t seem to climb above that bullish 70-level, which is somewhat discouraging.

Just because we’ve seen weak momentum relative to price action doesn’t mean that we can’t see a huge breakout northward in both price AND momentum at some point in the coming weeks.  I think that a breakout above the all-time highs would do it.  I also think that some sideways market action, followed by a big influx of institutional “smart” money could do the trick as well.

Along with the weak momentum, one of my other concerns is whether or not the market will be able to remain above that red-dashed line in the chart, above.  There’s a saying in the trading world that goes, like this:

“From failed moves in one direction, come violent moves in the opposite direction.”

Said another way, after the market hit its head on that red-dashed line a total of four times, if this breakout is “real,” then it’ll stay above that line.  However, if it fails to hold, then it’s possible we could see another big drop in stocks before we see new all-time-highs again.

There’s another saying in the investing world that goes like this:

“The stock market takes the escalator up, and an elevator down.”

While it’s a cliché, it’s absolutely true, and to compare what’s occurred in the market this past six months to that cliché, 2018-19 has been quite the opposite.  Relatively speaking, the market has taken the escalator down and the elevator up… but how long can that last?

Since World War II, the stock market has never fallen by more than -15% and then screamed back above its 200-day moving average (long-term trend) in such a short period of time, and without any material pullback or retest of the original lows (in this case, December 24th).  That doesn’t mean that it can’t happen this year.  There’s a first for everything, right?

However, as I’ve added stock, commodity, and bond exposure to our clients’ portfolios since mid-February, I continue to take a cautious approach to this market as opposed to throwing all our chips on the table and “hoping for the best.”  Hope is not a strategy and hindsight is always 20/20, and as I observe and analyze all the indicators I follow, the weight of the evidence not one that has me over-the-moon positive just yet.

 Bottom line, I still don’t think we’re out of the woods yet.  This dashboard of indicators that I analyze act as a “voting mechanism” of sorts – and these different metrics tell me whether the weight of the evidence leans positive or negative.  As I scan through these charts every day, I still believe we’re in a fragile, trendless market environment and while new all-time-highs and big future gains are entirely possible in the short-term, I’m not confident enough to put my neck on the line and say that it’s probable just yet. 

This is important:  Short-term trends break down all the time and aren’t much to be worried about.  Intermediate-term trends break down less often, but they act as warning signs.  But when the long-term trends in the stock market break down (like they did in early-December), those breakdowns need to be respected.

The U.S. stock market suffered a season-ending injury in the 4th quarter of 2018 and as is the case with all big injuries, you crawl before you walk.  Protecting retirement portfolios against catastrophic losses involves proper risk management.  This means implementing more conservative exit strategies on investments purchased, scaling in as opposed to going “all-in,” and of course, avoiding the use of hindsight in your analysis at all times.

The market is going through a period of post-injury rehab and physical therapy, and as we observe how next week and the coming weeks play out, it’ll be crucial to exercise care when it comes to the 4th quarter “injury,” and we need to crawl before we walk.

Meanwhile, enjoy the first full week of spring!

Till next time…

Adam