Written by Lance Roberts, Clarity Financial
While I point out the prevailing risks, and the disconnect between bullish sentiment and hard data, the reality is the bull market remains intact.
Please share this article – Go to very top of page, right hand side, for social media buttons.
Over the last several months we have been tracking the progress of the S&P 500 with pathways back to “all-time” highs. The very quick retest of support, as noted last week, set the stage for the push to market highs.
With portfolios still long-biased, the question is what happens next, and how to play it.
I have updated our pathway analysis to account for the breakout to new highs and the fact we are heading into September which has one of the poorest historical performance records.
- Pathway #1: An uninterrupted advance of the bull market with an expansion of volume and market breadth. This is a lower probability event currently given the extreme short-term overbought condition, light volume of the breakout and a negligible “buy signal” in place. (20%)
- Pathway #2: Is a bit more of an “exuberant” advance early next week which pulls back to the recent breakout level. The pullback consolidates a bit, works off some of the overbought condition, and then begins the next advance. Such a pullback would turn the previous resistance into support and provide a short-term “buyable” entry. (30%)
- Pathway #2a: Is a higher probability event given the overbought conditions currently. A pullback to 2800-2820 which works off the overbought condition and builds support at previous bottoms. This would also coincide with a “September” type performance and would set the stage for a traditional year-end rally. This would provide the best opportunity to bring portfolios to target weights. (40%)
- Pathway #3: This path is the least likely currently, but should be considered nonetheless. With all of the risks laid out above, something that triggers a credit-related worry in the market could send stocks lower. There is strong support built at 2740 which should initially hold. If it doesn’t we have other issues to discuss. (10%)
Again, with portfolios primarily invested, there is little for us to do. We did let some weak performers go last week and will look for a pullback to add to winners and make some new bets.
As always, when it comes to your portfolio:
“Do more of what works, and less of what doesn’t.” – Dennis Gartman
Have a good holiday. See you next week.
