As the stock market hits record highs, investors are wondering “will there be a stock market rally this fall?”.
Investors seem very compliant nowadays. In fact, this market is starting to feel a bit like the market of the late 1990s — when the strategy was to just “buy the dips”.
While the economics are vastly different now than in the late 1990s, the current mindset among traders seems to be the same.
Let’s take a look at the S&P 500 index. Long term, the upward trend remains in place. Every time the market dips, buyers come in.
To get a better look at the trading pattern of the current market, I like to look at point and figure charts (PnF).
PnF charts allow us to examine the overall up and down market movement with less daily “noise”. Downtrends are marked by a column of O’s, while uptrends are marked by a column of X’s.
By looking at the chart above, we can see that the S&P 500 is in a nice, orderly upward trend. Short term, we may see a pullback in the markets, but this trend looks very similar to that of last fall.
From here, I would expect investors to continue to buy the dips, as long as this pattern remains in place.
Bond prices are also continuing their pattern-
iShares Barclays 20+ Yr Treasury Bond (ETF) “TLT”:
As is the US Dollar-
PowerShares DB US Dollar Index Bullish (ETF) “UUP”:
No Fears Of Inflation?
Consumer credit expansion seems to be finally occurring after the last few years of stagnation. Watch consumer stocks over the next few months to see if they benefit from this.
This expansion in credit has led to some worries about inflation spiking up.
However, gold investors (who typically use gold as a hedge against inflation) seem nowhere to be found:
What Sectors Are Outperforming?
I also like to examine the relative strength of the major sectors within the S&P 500 index to help gauge what investors are flocking to.
Currently, the three sectors with the strongest relative strength vs the S&P 500 are tech, materials, and health care:
Source: Sector Sector SPDR as of 9/5/14
In addition to relative strength, inflows into ETFs can also help us get an idea of how risk adverse investors are.
The current inflows for September seem to indicate investors are generally bullish as money has been flowing into equities, while more conservative ETFs have seen outflows:
What To Watch For:
One indicator that I worry about is the NYSE investor credit balance. This measures the amount of credit, or margin, investors are using in their portfolio.
Low interest rates combined with low market volatility and the idea that the Fed will stop-loss the market, has led to ridiculously high credit levels.
The current level is surpassing the past stock market peaks of 2000 and 2007:
Investors should keep an eye on this as well as the long-term trend lines that are in place. A combined breakdown of these two indicators will be a warning that the market cycle is about to change.
Caution: When investor credit does decline, due to higher rates or rising volatility, the US stock market may contract at a very sharp pace.
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