So many guys have been pounding the table with doom and gloom calls for so long but they were dead wrong. When the market finally turns down they’ll likely pat themselves on the back and say they weren’t wrong, just early. As PLB rightfully says if you get direction or timing wrong, the trade is wrong. This is one of the most important aspects of trading not understood by most.
The market has been trading in a range for the past 18 months where SPX has been between 2,550 and 2,950 with a short trip to 2,350 last winter. All this time we’ve been hearing bad news about trade wars, tariffs, Brexit, growth slowdown, earnings recession etc. Stocks have been creeping higher despite all of this and are sitting just below all time highs. If you’ve been trading the non price related data you’ve been most likely losing money and are eager to short this bad boy yet again, right?
Here is a daily chart of SPX, the S&P 500 index. We can see the above mentioned range and also a rising wedge which implies volatility has been contracting over the past months.
While I’ve been bullish since the beginning of this year (see Risk on), there are times when it pays off to be tactically cautious and reduce your exposure. Like we did last Summer/Fall.
The futures are trading lower before the open and it will be interesting to see how the markets reacts later through out the session. If 2,900 holds, it would be very constructive for bulls and the sooner 3,000 is reclaimed, the better. In this case we shouldn’t be surprised if SPX reaches 3,300-3,500 within a year. However, should the price break below 2,900 there is a serious risk for a 10% correction from the recent peak. Don’t be complacent, even if you’re bullish.
This summer could be remembered as one when a longer lasting trend started, regardless if it will take us into a deeper correction (recession) or into a proper melt up, which is still my base case.