The S&P 500 is on a tremendous bull run: Up more than 15% this year alone. Eight new record highs in the past two weeks. Six months since the last measly 5% correction.
In fact it is starting to look like the last push up before a blow-off top. And, we all know what happens after that. Is it time to fade this rally?
We don’t think so, for two reasons, one technical and one based on the economic environment.
THE TECHNICAL ARGUMENT
On the monthly chart (inset) the index has now broken out from a long-term rectangle pattern going back to 2000.
This might be a fake break-out. The market is only up 6.45% from the 2000 high — a pretty good argument against the buy-and-hold investment strategy.
But technicians like us treat break-outs from long-term tops with great respect because they are usually followed by substantial moves. If this break-out is real — and we think it is — it presages a continuing run-up for weeks and perhaps months.
The SPX is now in uncharted territory — literally. It may be approaching a short-term resistance zone around 1666-1658. But, so far it isn’t close to the long-term resistance levels near 1735 (chart). There’s a lot of room to the upside.
THE ECONOMIC ENVIRONMENT
The run-up in equities is fueled by cheap money from the Federal Reserve which, like the rest of the world’s central banks, is pumping liquidity into the financial system as fast as it can.
Without the $85 billion in Fed bond purchases each month, bonds fall, interest rates rise, and the U.S. government’s debt-financing costs explode. That won’t be allowed to happen any time soon.
The Fed is riding the tiger, and the only way out is to keep the pedal to the metal and hope ‘real-world’ economic activity catches up to the market. While the Fed continues QE, the money will continue to find its way into the market, and the S&P will continue to levitate.
THE TRADE
“Is it time to short the S&P?” for us the short answer is: “Not yet.” There may be minor intra-day retracements, but the main trend is up and the bulls are in control. In fact we’re looking for a decent pull-back to enter on the long side.
That’s a scary trade, and we’ll be watching it carefully. But in our view, it is not as scary as trying to call a top in this runaway bull.
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Naturus is the web name of Polly Dampier, who is the brains behind www.naturus.com where she gives active traders live market guidance every day.
