The stock market has been resilient for the last few weeks only pausing to go much higher. Naysayers have watched in awe as the major indexes continue to rise without any significant pullback. We mentioned in our last article that we expected some level of negative rate of change in the major indexes but not a significant correction. The economic news remains mixed and questions about QE have increased although it looks unlikely that Janet Yellen will push away the punchbowl soon. It might be too much for stock market participants to evaluate a new Fed chairperson and plan for monetary policy at the same time.
The major averages are still on a positive trajectory however there may be some concern about momentum stocks and high flyers that have yet to rebalance substantially. It’s possible the current market rally is ready for another leg and the financials exchange traded fund (XLF) has reached multiyear highs. If the market goes much higher from here this could be a sweet spot where more investors begin to find out that the market won’t be looking back and momentum chasers as well as money managers who have been behind the major averages decide holding cash doesn’t pay.
I’m carefully watching the IWM and slowly adding to social media stocks while checking and mid-cap for resilience. Without leadership from momentum stocks, this could be evidence of sector rotation and money will flow back to the winning stocks, otherwise be suspicious of the relative strength indicators for the major averages. Regardless is hard to bet against this market with positive moving averages at different ranges I follow closely.
Stocks remain a standard deviation away from the 50 day moving average but the positive slope suggests traders are interested in looking for bargains when they see them. Pullbacks have been short and may continue to be longer term buying opportunities.