The U.S. stock markets are basically unchanged for the past 12 months but have offered much to get excited about in both directions during this time period. The recent rally has mostly cured the correcting trend from the summer, and now the market is back to the general trading level where it spent most of the past year. As a result of all the volume traded in the 17,300–18,300 area on the Dow Industrials, we think it is likely the index will stall in this area and take some time to get through this heavy area of supply. We would not be surprised if the rest of the year sees the indexes level off and trade in more of a range than a trend, and build for a potentially better year in 2016. The very mixed trends of the various stocks and groups tell us that the overall market is probably ready for a consolidation period in a tighter range than what we have seen over the past few months.
The strong market move of the past two weeks has travelled some 1500 Dow points and has brought the index up into an area of heavy resistance where the market spent most of the previous year in a trading range. We believe that this resistance area will lead to a short-term peak soon, followed by a pullback of about one-half of this recent run, to offer perhaps a better general entry point than what we have today.
The current rally looks somewhat similar to the move that the market made last year when it also rallied up from an October low and then corrected about half-way back, before resuming the bull trend. We believe that it is still a long-term bull market, but one in which stock selection may still be more important than the general market direction
There is good data and plenty of indicators to support an opinion for either direction, in our view, which is why market forecasting occurs in such a grey area – it’s never just black or white. The long-term market trend continues to be bullish from the 2009 lows, and the recent 12% pullback by the S&P has not changed this trend. The intermediate trend is neutral, as the level of the S&P is still the same as it was a year ago, and in the middle of the range for that period. The short-term trend is in a recovery after a correction, with stocks engaging in mostly mixed but overall improving trends.
VOLATILITY: With the recent abnormally strong reflex rally in the equity markets and the fact that the market is approaching heavy technical resistance, we feel it is time to buy more VIX to capture a spike in volatility if the retracement half way back plays out. Below is a graph that we feel is supporting our theory that the markets could see another wave of downside pressure if the recent bounce fails.
TRADING UPDATE: We have been putting a limited amount of cash to work into stocks as conditions warrant. At this time we are not seeing clear indications of what areas of the market may lead in a recovery, so a more general approach is best at this time.
We continue to hold cash levels of 20 – 25% that are limiting the portfolios to about 65% of the market volatility. The cash can be put to work quickly should we see opportunities present themselves and the hedge positions will remain a trading tool to improve risk exposure in the portfolios.