Market Bullish But Short Term Overbought
Unless you have been living in a cave :-), you would know that US Markets (Dow, S&P and Nasdaq) have made new all time highs. The Dow Jones has crossed above 19,000 for the first time in its history! Looking at the S&P 500 below, you can see that recent price action has it breaking out above its previous resistance level at 2,195 points. This is after it bounced off the very strong 200 moving average (red MA)
As you know, a breakout from resistance/consolidation is a very bullish sign. Yes, US markets are indeed in a very bullish phase right now However, unless you have been long already, I would caution jumping in right now and buying at this breakout. This is because the S&P 500 has shot straight up in the last week (right after the US elections), without a retracement and looks a bit overstretched.
When price breaks out and is overbought (far from moving averages and almost 90 degrees up), it is prudent to wait for a pullback/retracement back to support level (previous resistance) before going long.
Nobody Can Predict the Market: Lesson in Real Time!
Before the US elections, everyone (including me) thought that the markets would rally if Clinton won and crashed temporarily if Trump won. Sure enough, the markets did the complete opposite of what everyone predicted. When Trump was leading, the US Dow Jones futures briefly fell 800 points. However, the moment he was declared the winner, the market has its biggest rally in years… and its still bullish now.
This is the reason why we never want to predict the market. We never know how the market will interpret and react to the news until AFTER THE FACT. The key to success is to follow the price action of the market if you are a short term trader and focus on the fundamentals of the company we are invested in if we are a longer term investor.
What is Driving The Market’s Bullishness?
So, what is driving this market rally?
- Short-covering activity (when markets started going up, short sellers panicked and started buying to cover their short positions. This, in turn, added more buying pressure that sent prices higher and higher
- Strong leadership from the financial and healthcare sectors, led by banks, biotech, and major pharmaceutical stocks, all of which are seen as beneficiaries of a Trump Administration (Clinton wanted to control prices charged by Pharma companies and impose more banking regulations)
- “Pro-growth” initiatives that could come into play now that the Republicans now control everything (House, Senate and White House)
- Personal and corporate tax cuts
- Fiscal stimulus from infrastructure upgrades
- Rolling back increased regulatory actions
- The S&P bounced off its 200MA strongly and pushed above the 50MA easily
- Recent memory that the crash from Brexit was temporary and markets rebounded even higher eventually.
Anticipation of Interest Rate Increase in December Causing US$ to rally, Banks to Rally and Bonds/REITS to Crash
You may have also noticed that the US$ has broken out of its consolidation pattern and it is also rallying up in anticipation that interest rates will be hiked in December. As I have told many of you before, I am long term bullish on the US$ as the FED MUST eventually raise interest rates. As interest rates go up, the US$ will keep going up for the next 5 years at least. That is why 90% of my assets are in US$.
In a nutshell, the US equities market is on a clear bullish mode but may need to pullback first before going higher. At current prices, market looks temporarily overbought. Bond markets are on a downtrend and USD is on a strong uptrend!
Although we keep the Market bullish/bearish mode in mind, we make our investment and trade decisions based solely on our objective fundamental and technical setup rules!… as always
Happy Trading and Investing