Written by Lance Roberts, Clarity Financial
But Will It Stay
On Tuesday, the market broke out to all-time highs, but had failed to hold on to that level until a late surge on Friday.
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The breakout to “all-time highs” is something we have been discussing over the last several weeks both here and for our RIA PRO subscribers (Get A 30-Day Free Trial Now) with Technology leading the charge.
Currently, XLK is on a “Buy” signal (bottom panel), but that signal is “crazy” extended.
However, the good news is that four sectors have broken out to all-time highs and technology is one of them. This is suggesting the overall market will break out to new highs as well.
However, while that break to the upside was indeed bullish, the market remains very confined to a rising consolidation pattern and failed to close above the intraday all-time highs from last September. With the markets trading on VERY light volume on Friday, combined short-term “sell signals” forming, and pushing more extreme overbought conditions, it is too early to completely remove all risk management controls in portfolios.
Another reason not to completely throw “caution to the wind,” is the market only requires roughly a 0.40% move in one direction or the other to break out of this very tight compression range.
The good news is a breakout, and a successful retest, to the upside will most likely lead to a continued move higher over the next month or so.
The not-so-good news is a confirmed break to the downside would result in a short-term correction ranging between a 3% decline to test the 50-day moving average, a 5.4% decline to the 200-day moving average, or a 7.7% decline back to the March lows.
While such a correction certainly falls within the realm of “ordinary” within any given year, and would provide a much better entry point for adding equity risk, clearly the risk outweighs reward at the moment and suggests higher levels of cash remains prudent.
Looking at a longer-term chart, we can see the overbought condition becomes clearer. With the market testing the underside of the running bullish trend line from 2009, a negative divergence in relative strength, and a “sell signal” in place, the historical price action under these conditions also suggests caution.
While the “bull market” is indeed back with the break out to new highs, the question is “whether it will stay.”
Bull market rallies of this magnitude and acceleration combined with diverging technicals have been met with decent corrections in every case previously.
Could this time be different? Sure, it just isn’t wise to “bet on it.”
Being patient will offer a much better entry point to add exposure to portfolios most likely sooner rather than later.
