Weak Breakout

In The Highstreet Group by John Bartoletta

Weak Short-Term Breakout

DOW JONES: We believe that the stock market is re-entering its long-term secular bull trend that has the potential to rise substantially over the next several years, and the intermediate-term trend for the next several months also looks bullish. However, on the shorter-term basis of days-to-weeks, it appears to us that the market is reaching an overbought condition that will likely soon lead to a pullback that could amount to about half of the recent advance from the 17,000 area on the Dow Industrials and the 2000 area of the S&P 500.

What this means is that many stocks should continue to be held, but the timing on new buys could be more favorable in the weeks ahead. Of course, we have the months of August, September and October coming up in our near future, which statistically is a period creating buying opportunities, along with all the other excitement that seems to show up in that time frame. This all goes to say that we believe it may not be the best time to start an aggressive buying program, but with a little tactical planning, some better general entry points are very possible over the next two months.

DOW JONES vs VOLUME: As referenced in our prior update, trade volume has lagged during recent rallies but its significance has really come to the forefront over the past 3 weeks during the post-Brexit rally. While this lack of conviction is a red flag, when combined with the Overbought conditions seen in the trend oscillators (bottom pane of Dow and S&P charts shown above and below), we become very cautious over the direction of the market in the short-term.

TRADING UPDATE: Given the trading range in the markets, our overall trading strategy of holding an above-average allocation in cash and exercising patience has changed little over the past few months. Using a bottom-up approach to security selection, we are taking advantage of shorter term equity investment opportunities as they present themselves while keeping cash on the sidelines.