Even a bearish-leaning trader like me has to be impressed with yesterday’s market action.
The S&P 500 gapped above the resistance of its old high and then just kept climbing. All day long I kept looking for some sort of pullback to occur. But it never happened. Stocks just kept pressing higher.
By the end of the day, the S&P 500 finished up almost 23 points, and well into record territory.
Just about every major market sector was higher – including the bank stocks, which were lagging behind the market for most of September but have played a remarkable game of “catch-up” over the past two days.
Chinese stocks rallied too – adding on to their gains for the week. Even emerging market stocks were targets of yesterdays buying binge.
Everything went up. This was one of the biggest buying binge days we’ve seen all year.
So, of course, I’m worried.
It’s usually a bad idea to chase stocks higher into overbought conditions. And that’s what investors were doing all day yesterday.
They may not be doing so much buying today, though.
Take a look at this chart of the S&P 500 along with its Bollinger Bands…
The S&P 500 has bounced back up to the resistance line of a bearish rising wedge pattern. This action has created negative divergence on the MACD, RSI, and the Commodity Channel Index (CCI), another measure of overbought or oversold conditions. If you look closely, you can also see that the index closed just above its upper Bollinger Band yesterday. This typically indicates an extremely overbought condition.
The last time the S&P 500 was in this condition was also the last time the index made a new all-time high. That was three weeks ago, when the S&P hit 2916. Five trading days later, the index was at 2870.
This chart shows the potential for a similar move right now. But even worse, if the S&P breaks this rising wedge pattern to the downside, then we could get a move back down towards the August low at 2825.
It doesn’t have to happen that way, of course. The bullish momentum right now is quite strong. It’s possible stocks could just consolidate around current levels for a few days and relieve the overbought conditions through time rather than through a price decline.
It seems to me though, that with option expiration today, an FOMC announcement on interest rates next Wednesday, the potential for negative headlines on the trade wars, and the recent breakdown in the dollar… investors might consider holding off for a few days before committing more money to this market.
Best regards and good trading,
Jeff Clark
Editor’s note: Time is running out…
The first annual Legacy Investment Summit is just a couple of weeks away. And it’s setting up to be an event for the ages.
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Reader Mailbag
In today’s mailbag, one reader shares where they’ll put their wealth when the Fed derails the stock market…
Dear Sir, my plan is to fully fund a hybrid life long-term care policy. Not sexy, I know, but a prudent step. It secures a moat around my resources and allows me and my family to dictate where I will be “warehoused.” Plus, it keeps the government (Medicaid) out of the equation.
– Anonymous
And others agree with Jeff’s thoughts…
Great warning regarding stocks. Global demand is in the dumpster and rising rates almost guarantee a fall, sooner rather than later. Great read.
– Rick
What a great read on buybacks. I knew most of it, but Mr. Clark opened my eyes even further. Once upon a time, stock buybacks were illegal. I am beginning to see why it was so. But grease a few palms with campaign contributions, and who knows?
Corporations borrow at 2%, buy back their stock which pays a higher dividend, save the amount that would have been paid in dividends, and even get to claim the interest on what they borrowed on their tax return.
The fact that they could have borrowed at low interest rates, and increased manufacturing, shows that there must not have been any demand to do so. Then they use the borrowed money, as Mr. Clark explained, and the tax gift to buy back even more shares. So their P/E goes up and they get their bonuses raised even higher.
Meanwhile the gifted BS about how great everything is continues. Seems those campaign contributions were a good investment after all. And the populace does not even realize that the campaign contributions are bribes; money for favors granted. Thank you, Mr. Clark.
– Bernie
Were you impressed with yesterday’s market action, or are you worried? What do you make of this “buying binge”?
As always, send in your trading stories, question, or suggestions right here…
And, for the Delta Report readers, don’t forget to submit your questions for Jeff’s live Q&A on October 4th.