The S&P 500 added to last week’s breakout and continues its steady ascent into record territory. A tenth-of-a-percent is definitely not setting the world on fire, but these slow and deliberate gains tell us there is strong support behind these prices.
Rather than take profits near prior resistance, most owners are confidently holding for higher prices. While conventional wisdom warns us about complacent markets, what it fails to mention is periods of complacency last far longer than anyone expects. Confident owners don’t sell dips and the resulting tight supply props up prices. That description fits this market to a tee and I don’t see a reason for that to change anytime soon.
Several weeks of bearish headlines failed to dent this market and Trump was at it again Tuesday, telling the UN he will “Totally Destroy” North Korea. But by market standards, this is already old news and it barely reacted to those provocative headlines. Clearly these headlines matter to geopolitics, but they no longer affect the market because anyone who fears these North Korean headlines sold weeks ago. These nervous sellers were replaced by confident dip buyers who demonstrated they are not afraid of these headlines. When no one is left to sell the bad news, it stops mattering.
A market that fails to go down on bad news creates a powerful buy signal. It means the path of least resistance is higher and prices will pop once the flow of bad news abates. That is exactly what happened last week when we surged to record highs. While it is easy to say this after it already happened, readers of this blog knew this rebound was coming several weeks ago.
Going against the crowd and buying when everyone else is running scared is hard to do, but that is the best way to make money in this business. Keep your cool by carefully analyzing the headlines and price-action. The thing to remember is trends continue countless times, but they reverse only once. Keep that in mind every time someone tries to convince you this time is different. Without a doubt they will eventually be right, but they will be wrong an awful lot before that happens.
As we saw today, the North Korean rhetoric no longer matters to the market and we can safely ignore it. Next item coming up is the Fed’s policy statement on Wednesday. Consensus is the Fed will start winding down its balance sheet. This is an anti-stimulus move, but the market is largely ready for it. Yellen and the Fed have done a great job telegraphing their moves to minimize disrupting financial markets. While we should expect a brief bout of volatility, it’s been years since a Fed decision affecting the market in a significant and lasting way. I don’t expect Wednesday to be any different.
If this market was fragile and vulnerable to a crash, it would have happened by now. Last month’s dip and consolidation refreshed the market and gave us a solid foundation to build on. That said, the market likes symmetry and last month’s small and short dip will lead to an equally unimpressive rebound. We’re already most of the way there and it will take something new to keep prices rising.
Luckily there are a lot of recent sellers and underweight money managers under pressure because they are missing this rebound. Soon the fear of a selloff is going to be replaced by fear of being left behind. Expect this chase for performance to fuel a strong rally into year-end.
As I said previously, if we were going to crash, it would have happened by now. Markets don’t move in straight lines and expect volatility to continue, but the path of least resistance is definitely higher. Stick with what has been working: buy-and-hold and jumping on each dip.