This is an interesting market dynamic that we have here at the current moment; anytime a short term weakness presents itself, the next trading day just stomps it back into oblivion. The market will not always act this way, but until it changes we have to do our best to stay the course and ride this wave as far as it can go. Something I have been noticing is that since the beginning of this 6 month surge, any time traditional rules for risk management suggest a pullback, the market ignores it completely. This is something I have thought a lot about recently. What the market is doing is starting to set the stage for the later stages of the bull market. It is crushing any and all doubt and is forcing participants to accept the prospect of higher prices. Typical risk management and common sense have been cast aside, any and all buys are being rewarded, while sells are being punished.
My best guess as to what is being instilled in investors/traders habits is that the market is lulling them into thinking that the market will simply not go down, and if it does go down, any pullback will be very short lived with higher prices coming shortly after (Acceptance/Confidence). This will, in all likelihood, create another bubble type situation in equity prices in the future. Just as with the housing bubble and the dot com bubble, participants were absolutely convinced that those assets would simply never lose value and would just continue higher unabated. What this does is create a situation where people will become greedy and too overconfident to follow and observe solid risk management principles (Euphoria). So far any sort of profit taking has shown to be a hasty and impatient choice as prices continue to rip straight up. This is likely to continue much longer than people think is reasonable; as the saying goes, "markets can remain irrational longer than you can remain solvent".
Basically what I'm getting at is equity prices are likely to continue higher long enough to get everyone complacent and over-exposed, only then will the cycle be completing and a longer term trend shift be underway. As far as I can tell, we are not near to a euphoric state as many still feel stocks are too extended. These are the same ones that are lagging the averages and under-invested, they NEED a pullback. As long as there are those who are noncommittal and on the sidelines, prices are likely to leave them in the dust. There will be some pullbacks along the way, but until psychology changes, prices are likely to continue to push higher.
Here is the Weekly chart of the SP500 back to the '07 peak:
The long term view is very strong looking as long as the 1,576-1,538 support is held. Right now we have the 20 Week MA within that support band and well as the rapidly inclining trend support drawn from the 2011 lows.
Shorter term here are the levels of interest (Depending on your trading/investing time frame)
This is the 30 Minute chart looking back about 2 months
I am trading the SP500 based on this short term uptrend and so far it continues to act well. A break of 1,648 would cause me to exit my short term trade. At that time I would expect a retest of the prior breakout level on the longer term chart near 1,600. Until a breakdown occurs however, things still look up.
Several of our Top 10 stocks are acting very well and are following the broad markets to multi-year or all-time highs.
HD
HD announces quarterly earnings before the market open this coming Tuesday. Price has once again tested the upper trend range and I took some profits this week on my current holdings. I tend to reduce my positions heading into an earnings announcement, especially when we are at the upper trading range and there are a lot of high expectations for this quarters results. The relative strength trend is now testing a very important level and it will be interesting to see how the stock handles the announcement on Tuesday. This stock is a hold above key trend support currently near $69.
F
Ford just keeps doing very bullish things. After forming what looked like a double bottom pattern from mid-2011 through mid-2012, it setup a very nice reversal pattern triggering a strong rally off the August 2012 low. Now it has gone through a 4 month consolidation and in the past 2 weeks has really started to accelerate to new multi-year highs. Keep riding this one until we see a change in relative strength and/or a breakdown of the current price uptrend.
WFC
Wells just continues to be strong and one of the leaders in the undervalued Financial sector. We are looking at a long term, weekly chart here and as you can see it is making new highs very consistently since the breakout of the $34.50 resistance level. It was also disclosed this week that as of the beginning of May, WFC is the largest holding of Warren Buffet's Berkshire Hathaway portfolio. Hey, if Warren Buffet likes it, who am I to argue?
I currently view the Financial sector as having lots of upside potential and the market will continue to rally as long as the Financials are performing well. The sector can be played many ways: it can be played very aggressively through JPM, BAC, MS, C or it can be played more conservatively through WFC or USB. A holding I recommend is to own WFC and one of the other risky plays in the space; what I like here would be pairing WFC with JPM or BAC in a portfolio, where you hold twice as much WFC and then half as much JPM. For example hold 50 shares of WFC and about 20 JPM, that way you can play the sector aggressively with a reduced JPM position and then take a more stable approach with a larger position in WFC. Both will provide roughly a 3% dividend and plenty of upside when the market rallies.
PBW
Clean Energy sure has caught a bid after its short term breakdown over the past 2 months. This is a weekly chart showing a nice reversal setup that has broken out and then confirmed with 2 consecutive weekly closes above the breakout level on massive buying volume. Even after this nearly vertical rise in the past month, the target for the reversal is still 15% above current prices. I added to my position two weeks ago on the breakout and will look to add more shares on any kind of weakness we see to retest the breakout level.
DDD
3D has gone parabolic over the past 2 weeks and tested its all time highs this past week. We have seen some weakness since the test and I took partial profits on my holdings here. But overall this still looks like a monster stock in a growing and intriguing industry for the future. What I am hoping happens here is a sort of Cup/Handle formation that would give this massive up move a short consolidation before continuing the strong uptrend. Again, I think this stock is just in the early innings of what could be a revolutionary change in technology and an absolutely massive stock price. At the same time though, after getting over a 40% gain over the past month, I did take some profits last week with the hope of being able to buy those shares back when we have a better risk/reward point to continue off of.
ENB
Enbridge has continued its steady climb and higher highs. Something of note here however is the test of the long term relative strength trend support. Here we are looking at the Weekly chart and as you can see this is a 6 year relative strength uptrend. The ability to hold this support will be very important for my position size going forward. If the Relative Strength fails, I will hold no more than a minimum position. I do still plan on holding this stock in some capacity as long as its above key support at $41
HAIN
HAIN broke out from its developing reversal pattern and has now retested the breakout area. After a brief dip below the breakout level of 62.50, price has rallied and now closed at the highest weekly close since since late last year. HAIN reported another record quarter 2 weeks ago and the stock has steadily declined since the announcement, but seems poised now to retest its prior all-time highs at $72. Stops on this breakout should be placed below the shakeout low around 61.50.
This is currently my largest holding after I added to my position after the earnings slide and breakout retest. Both long-term and short-term I think HAIN is a big winner.
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