The U.S. stock market has been on a tear recently and defied expectations of a pullback with increased strength this month. Volatility declined sharply as traders gobbled up equity shares while the TLT faltered. The current environment is bullish but the intermediate term could be a bit extended. This doesn’t mean that holding cash is the best option but shorting doesn’t seem like a good strategy until several days of declines lead by a 2 percent down day.
The S&P 500 looks to continue making new highs and global concerns have declined with Greece reaching a temporary deal. February 2015 has been marked by geopolitics and less focus on market internals which could be a bit frothy. The longer-term trend is still bullish and now that the market has broken out of rangebound territory, traders may be looking to follow momentum for the next few sessions.
A healthy pullback would allow the market to consolidate and move higher but this hasn’t happened in the last few days. There are several reasons to be bullish which include leading stocks like Facebook and Apple bouncing higher. If the leaders can continue to attract new capital, the market is poised to continue rallying.
The Fed has shown an unwillingness to allow equities to have a viable investment alternative and if yields begin to rise with the TLT falling, the Fed could have less to worry about until equities correct somewhat. I would continue buying on the dips but I’m cautious about the impact of falling oil prices on the overall market. I don’t believe oil has bottomed and the second leg of the current downtrend could be near if current resistance levels hold.
I continue to watch the XLF and IWM carefully to see if they can generate clues to the overall market but midcaps (MDY) may tell a better story. The XLF is still down 1.15 percent for the year while the S&P500 is up 2.75 percent and the NASDAQ is up a whopping 5.00 percent with a gain of nearly 8 percent this month. Watch the financial carefully to see if a lower low isn’t possible – don’t fade on a knee-jerk reaction as the market is still dominated by buyers. Midcaps have gained 5.00 percent YTD but are less volatile than tech stocks. It’s time to wait for viable setups while the market tries to remain in rally mode.
The indicators in the graph above show the S&P 500 has had a nice rally that may not be too steep because of several weeks of consolidation. The 50 week moving average is no longer downward trending and a possible near-term target could be 212.67 with 207.44 and 204.87 as support. Yellen could be a momentum accelerator if a brief inflection point occurs.