Over the past two weeks, I’ve started to notice a change in character in the market. It is beginning to look like the S&P 500 needs some time to “take a breather” and rest after a strong uptrend over the past three months.
Prior to this week, the S&P 500 was been up 16 out of the last 18 weeks. Just visually looking at a weekly chart, we can see how that sharp runup has led to extension from both the 50 and 200-day moving averages. These are important guidelines for the market, and it is both healthy and normal to see pullbacks towards these lines. We've also started to see some distribution appear on the QQQ.
In addition, we’ve started to see some of the major leaders crack and open up this week. NVDA and SMCI both started to see some volatility come in near the $1,000 level. I always make a note to watch the action of the leaders. As Jesse Livermore stated, “As the leaders go, so goes the entire market. If you cannot make money in the leaders, you are not going to make money in the stock market.” When I do my stock screening, I’ve also started to note that many stocks are very extended, and I’m not seeing many new setups. This is usually a signal that some time is needed for stocks to base and reset.
Sentiment has also gotten overly bullish. When we look at AAII Bulls and Bears, we can see that the bulls have reached very high levels, while the bears have reached very low levels.
My long-term view is still ultra-bullish. It may just be that the market needs some time to pull in here to set up a bigger move. Whatever the future brings, it’s always best to think “risk first” and to sit and wait for the “fat pitch” rather than to hurry and force trades that ultimately hurt your performance.
Risk right. Sit tight.
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