The First Big Test for This Rally
The first big test for this rally... Why stocks are likely to take a 'breather' soon... What to watch for over the next couple of weeks... Have you reserved your spot for the Bull vs. Bear Summit?...
U.S. stocks have been on a tear for the past several weeks...
Since falling nearly 20% from September 21 through December 24, the benchmark S&P 500 Index has rallied more than 16% through yesterday's close.
It's been an impressive move... And it's led many folks who were predicting a bear market just a couple of months ago to declare that the bull market is back.
Now, they could be right...
This rally could be the start of a new uptrend in stocks.
But just as we warned you not to get too bearish and sell all your stocks as the market plummeted last fall... we'll caution you not to get too bullish as stocks surge higher today.
First, despite this big rebound, the broad market remains in a downtrend. We've yet to see a "higher high."
Second, and more important, the pace of the recent rally – on track for a 260% annualized return to date – is simply not sustainable. As we often say, stocks are like sprinters. They can't run flat-out for long without stopping to take a "breather."
At some point, this rally will stall out or reverse...
And as our colleagues Ben Morris and Drew McConnell noted to their DailyWealth Trader subscribers yesterday, we're likely nearing that point now...
An asset's long-term trendline often functions as major "support" and "resistance" levels. "Support" is a level at which folks tend to buy an asset and prices often stop falling. It's an obstacle for falling prices. "Resistance" is a level at which folks tend to sell and prices often stop rising. It's an obstacle for rising prices.
One of the most widely used measures of an asset's long-term trend is its 200-day moving average (200-DMA).
In the chart below, you can see that the S&P 500 is in a rip-roaring rally. It closed yesterday at 2,725. And it's about to "bump its head" on its 200-DMA, at 2,742...
As they explained, this level is likely to pose significant resistance for the market...
If this is merely a sharp bear-market rally, this would be a logical area for a reversal.
Yet, even if this is the start of a new uptrend, stocks are unlikely to break through this important level on their first attempt. So Ben and Drew believe this is an ideal place add a few "hedges" to your portfolio, just in case. More from the issue...
Lots of folks think that taking a bearish position is a "bet against stocks." It's not...
If you were actually betting against stocks, the bearish positions in your portfolio would outweigh the bullish positions. For 99.9% of you, that's probably not the case.
A bearish position within the context of a bullish portfolio is a "hedge." It means you have some degree of doubt... that you're not 100% gung-ho, "stocks are never looking back" bullish. A hedge helps protect your portfolio in case the market turns...
Chances are, most of your portfolio is in bullish positions. It makes sense to add a hedge. And the timing is just right.
Our colleague Greg Diamond – editor of Ten Stock Trader – is also urging caution...
Like Ben and Drew, he's been warning his subscribers of big overhead resistance for the market. But he's also tracking another sign that suggests a pullback is likely...
The following chart shows the S&P 500 along with its relative strength index ("RSI")...
As regular readers may recall, the RSI is a momentum indicator. Readings of 70 and above mean an asset is "overbought" and may be due to pull back. Readings of 30 and below mean an asset is "oversold" and may be due to rally.
As you can see, the S&P 500's RSI is now approaching an oversold extreme last seen at the market's all-time high in September. Yet, prices remain well below those levels.
This is often a bearish sign... And there are already similar divergences on several other major indexes, including the Dow Jones Transportation Average, the Nasdaq 100 Index, the small-cap Russell 2000 Index, the NYSE Composite Index, and the Global Dow Index.
To be clear, Greg isn't turning outright bearish just yet either...
Like us, he thinks it's still too early to declare that this long bull market is over. However, he believes the next couple of weeks could provide some important clues to the next big move in stocks. As he explained in his Weekly Market Outlook on Monday...
Almost every year during this time frame there is some type of major change in direction or extension of the previous trend. The key this year is how the markets trade into this time frame.
As a general rule, if stocks are making extreme highs into the first or second week of February, caution is warranted. If stocks are making extreme lows into this time period, it is likely a buying opportunity – just like the last three years...
The best-case scenario for a bullish extension would be similar to 2017 – a small correction followed by a continuation of the bull market. This would likely be a move down to the 2,600 level, followed by a breakout above the 200-day moving average at 2,740, and then ultimately higher highs above 2,800.
Remember, the market is still in a downtrend with lower highs since October – the market has to break this structure to reverse in an uptrend.
For now, we'd encourage you to join our friend Dr. Richard Smith for a special event next week...
As we noted on Monday, Richard is hosting his "Bull vs. Bear Summit" next Wednesday, February 13, at 8 p.m. Eastern time.
During this event, you'll hear directly from an expert panel of well-known bull and bears, who will answer your biggest questions about today's market and share what they're personally doing with their own money right now.
You'll also learn a few simple strategies you can use to safely make more money no matter where the markets go next.
Again, this event is absolutely free to attend. You'll even receive a free copy of Richard's new research report – "How to Know the Exact Day to Sell Any Stock You Own" – just for signing up. If you're interested, simply click here to reserve your spot right now.
New 52-week highs (as of 2/5/19): Cameco (CCJ), Essex Property Trust (ESS), Kirkland Lake Gold (KL), Nestlé (NSRGY), Sandstorm Gold (SAND), and Starbucks (SBUX).
The mailbag is awfully quiet lately. Has the market lulled everyone to sleep? Drop us a line at feedback@stansberryresearch.com.
"Maybe it's just a lucky spell with the market rising, but Doc's Advanced Options looks great so far. I'm even dipping my toe in the water with just 1 or 2 contracts done on other recommendations as well as official AOS trades. I'm up on 7 out of 8 positions, with gains of 43% to 878% annualized. This could make a big difference this year." – Paid-up subscriber Clint H.
Regards,
Justin Brill
Baltimore, Maryland
February 6, 2019