The S&P 500 closed at a new all-time high yesterday. Upon hearing that, the average investor’s first instinct is to think that the market is topping out. Stocks are too expensive. Valuations are dangerously stretched. The higher they fly, the harder they fall. We are overdue for a crash etc., etc..
However, we here at DIY Investor know better. Perma-bear fearmongering is as unhelpful as unchecked bullish exuberance is dangerous. Emotions and feelings aside, here are the facts: after making it’s FIRST new intraday high in over a year on July 11th, the S&P 500 made 8 additional new highs and there is no reason to think that there aren’t several more on the way. Only ONE of these new highs will be a long-term top. MOST of them are just stepping stones to higher and higher prices. That’s why, counterintuitively, new highs are bullish.
If this rally continues, fears of a failed breakout will give way to a fear of missing out. IF this happens, the market can enter a mania phase where the uptrend gains EVEN MORE momentum. IF the last remnants of fear give way to unbridled greed, the market can explode into full-on bubble territory, which would mean we would see MUCH higher prices than we are seeing now. When this hypothetical bubble inevitably bursts, it will end badly for those that are unprepared. However, those of us with a plan will do very well and be able to lock in the lion’s share of our increased wealth.
Before you accuse me of smoking something, let me just say that I fully understand that this is a far-fetched potential scenario. Nevertheless, I do believe it is one worth keeping in the back of our minds as we break out of a year consolidation to new highs.
P. S., I only provide the actual buy and sell instructions for our 821x model trade here on the blog and through email to subscribers. Be sure to follow me on Twitter @marketchameleon for updates in between. On Tuesday, we received an 821x sell signal on NTG, our model trade. However, I recommended via Twitter that we not close the position unless it closed below $18.10. The stock pivoted and proceeded to put in an 821x buy signal on Thursday so far averting an unnecessary shakeout!
— David White (@marketchameleon) August 3, 2016
“News” that George Soros is shorting stocks grabbed headlines once again this week. I don’t see why this is getting people so worked up. Soros has supposedly been making big bearish bets since the beginning of the year. He’s been warning of a repeat of the 2008 financial crisis and apparently has a 2.1 million share put option against the S&P 500.
I have no clue if George Soros is right. However, I do know that “news” like this does nothing to help us make money. We make money when we position our trades in the direction of the 8 and 21 day moving averages. Right now these moving averages are rising, so we are bullish and long stocks. In fact, this week the S&P 500 poked through the highs of last November, essentially negating the macro pattern of lower highs and lower lows that has controlled the big picture over the last year.
The only argument bears can make now is that this was a failed breakout which will lead to a fast drop lower.
I will grant that this is a possible scenario. However, the weight of the evidence we have right now still points to higher prices.
If Mr. Soros and the bears turn out to be right, we will have plenty of time to change our stance and position our portfolios accordingly. We would lock in profits and raise cash as our holdings give us 821x sell signals one by one. We could look to move some money into other asset classes such as bonds and/or gold. Finally, we may take bearish bets against stocks alongside Soros by purchasing inverse ETFs,
We will have sufficient early warning.
We have a plan of action.
There is no reason to fear.