The third quarter is off to a good start, for the bullish side of the ledger at least. The general stock market has been showing strong results for several weeks now, but a few small cracks have emerged in the bull market wall.
Digging beneath the surface and ignoring the noise, we see a market that is maintaining a solid uptrend dating back to March 23, 2020, but there are a few small cracks in the wall. The S&P 500 and the Nasdaq hit new highs this week, but the Dow Industrials, Transports and small cap indexes did not. The number of stocks advancing in price versus those declining in the S&P 500 and the Nasdaq is not keeping up with the rise in value in these indexes, which can be driven by a few large companies. The number of stocks hitting new 52-week highs also has not kept pace with the major indexes.
This is not a cause for panic.
The S&P 500 just put in a new high of 4392 as I type. If the current short-term negative divergences I just discussed lead to a general market correction in coming weeks, it is not likely to develop into a nasty affair. But 5-10% pullbacks are a normal part of any bull market, and this bull will not be immune to such setbacks.
I will remain prepared to buy any future selloffs.
It is important to note that even if a coming correction takes the market down 15%, it will still be in the context of an ongoing bull market. In 2010 the S&P fell 17% from early April through late June, followed by a 20% correction in the early summer of 2011. The S&P then doubled from that 2011 low up to the July 2015 high. Obviously, it would have been nice to sell near the 2010 and 2011 highs, then buy back near the lows. If you didn’t, though, it was still a decent ride.
There is a strategy for situations like this.
For longer-term retirement accounts, pretend you are at the barber and take a little off the top. Not much. Just enough cash in case the market drops more than 6% in the next few months, so you can average back in at a better price.
For shorter-term portfolios (compared with retirement accounts), it is time to keep tight stops and not add much on the long side.
There are two conditions that can develop that will get me more interested in getting longer.
The first is a broad market breakout to accompany the new highs currently being seen in the Nasdaq and S&P. A broad upside move would negate the negative divergences mentioned above and encourage wide follow through.
The second condition is enough selling to bring prices down to levels attractive enough to entice longer-term new money into the market. This condition would be observed through mild to deeply oversold levels on the major longer-term indicators such as advance decline and volume lines.
I will be sitting on my old Roman hands until we see one of these conditions show up.
Related: Ancient Roman predicted Bitcoin crash, June 28, 2021
Related: Ancient Roman predicted June rally in the U.S. dollar, advises on gold, July 7, 2021
Watch for future announcements from Romulus about future profitable market moves, important indicators, and major market swings. For more information about trading education or to trade with Romulus, contact John Reed at firstname.lastname@example.org or go to www.groktrade.com/romulus.
In his real-life existence, Romulus started on Wall Street in 1994 and traded for a hedge fund for 13 years. For the past 12 months he has been a teacher and mentor working for Grok Trade, a stock trading educational company in business since 2007.