The S&P 500 index finally closed above its all time high from January 26th of this year with very little selling pressure. Frankly, I’m pretty surprised at the lack of volatility and average volume. I’m not surprised we made a new all time high though.
See weekly SPY chart.
SPDR’s S&P 500 Trust Series ETF (SPY) weekly
The fact that we made a new all time high is good but my concerns linger; mean reversion and those nasty short sellers in the neighborhood.
Mean Reversion
The mean is now 14% below current price and when the market dumped in February from the all time high price was about 17% above the mean. So, price is basically the same as it was before the dump but we are 3% closer to “fair value” in the current bull market from early 2009.
Maybe we are undergoing a mean reversion through time as opposed to price. Theoretically, current price will be the mean in October, 2020 provided the current bull market primary support isn’t violated prior to then. We could go range bound for the next two years. Remember, anything is possible. I’m not suggesting it’s likely, just possible.
Nasty Short Sellers
I think they went dormant until after Labor Day. They sure didn’t show up in masse last week. There was so little selling pressure we cruised through the all time high with barely a head wind. I don’t doubt they are there but, so far, they aren’t pushing the sell button.
Please note that the Dow is still 3% below its all time high from February this year. Even though the Dow and S&P 500 index are highly correlated it’s more significant that the broader index cleared and closed above the previous and important high.
What’s likely is moving towards a more sustainable uptrend. The slope of the bull market from 2009 is an annualized return of approximately 13.5%. The slope of price from the bottom in early 2016 is running closer to 20% annualized. We need a little old fashioned mean reversion. We just don’t know when, yet.
So, stay long my friends.
Only one sell signal this week:
Moody’s Corporation (MCO) daily
I recommended this on July 27th. Even though it’s only down 3% from my recommendation I don’t like recent price action. I recommended this at 1/5 normal position size. I am now recommending selling MCO.
Continue to hold all other open recommendations.
Caution Ahead
Small Caps are poised for a counter trend reset.
iShares Russell 2000 Index Fund ETF (IWM) weekly
There is one other issue I want to alert you to. IWM, the iShares Russell 2000 Index Fund ETF, is banging up against it’s upper channel bracket. Short sellers and profit takers like to do their counter trend selling up here and create a little mean reversion. This is totally normal and nothing to be concerned with except it will effect most everything else except oil and fixed income. So, don’t be alarmed to see some selling soon. We all need a little mean reversion every now and again.
Texas Tea
I still have some very opportunistic charts but I’m still cautious short term. Except, I like light, sweet crude, black gold, Texas tea. We are currently long XLE, the energy sector ETF so consider your own exposure to energy before adding more.
United States Oil Fund LP (USO) weekly
USO has been in a very orderly uptrend for about one year. Price consistently goes higher after nearing or hitting support (this is where the buyers live). We got another hit last week and a strong bounce higher. See weekly chart.
I recommend buying USO. All current support zones are drawn in.
By the way, gold sucks. It’s the same price it was in 2013. No thanks. This is what range bound looks like.
SPDR Gold Trust (GLD) weekly
Oil vs Gold vs Commodities Comparison chart
Oil has under performed commodities and gold for many years (see comparison chart) from 2009, however, it has been out performing commodities and gold for the last 12 months. So, considering oil is a commodity and there is some long term directional correlation with gold and other commodities I am going to buy some on Monday. Plus, I like saying “light sweet crude”. It has a certain ring to it.
That’s all for now my friends. Hold all open recommendations and most importantly…
Have a super wonderful week. Go out and smile at everyone…I bet they smile right back at you.
Trade Smart,
Don