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