The market spent last week churning with major indices all finishing the week lower. The S&P led to the downside finishing -1.24%. I'm not going to harp on how high we are or how unusual and long lasting this bull market run has been without even a test of its 200day MA. I think that at this point everyone knows the risks involved with buying just off the all time highs. At least to me, common sense dictates if you are a long term investor you wait until a company goes on sale before you buy and hold. I once read that the sure fire way to get rich is to find a great profitable company and buy it at a 50% discount to what it's worth. Of course quantifying true value in an emotional flavor of the week marketplace can seem next to impossible as stocks are only worth what price people are willing to trade them at. This market rewards popularity, momentum. People buy what they know and understand. People love their AAPL, NFLX, TSLA. They check their FB every day so surely the stock will go up forever, right? The unfortunate reality of the situation is no, stocks do not go up forever. Stocks ping back and forth between extreme levels of undervaluation and overvaluation constantly. Good luck buying something that is fairly valued, most likely it is at one extreme end of the spectrum or the other. TSLA is now trading at 34x estimated 2019 earnings That doesn't sound like a 50% discount to me. Some of these companies are turning into 2014 tulips and sooner or later these wildly overvalued momentum names are going to get smacked down hard IMO.
Check out the P/E on TSLA. -206.81 Do you really want to be chasing this thing up here?
Next week we have the biggest IPO of all time as Chinese internet company Alibaba goes public valued at $21.1B I suggest to you that this offering which the underwriters stand to rake in absurd amounts of dough from could be similar to the skyscraper indicator foreshadowing a potential decline in equity markets. Money losing ipos are at a 14 year high, the greedy investment bankers are loving this bull market and are milking it for all it's worth.
I started getting bearish on the market in June with this post Bull Market Could Be Topping Out and honestly not much has changed except higher prices. I wasn't aware of just how grindy and slow summer trading was at the time and got squeezed out of some shorts. I was taught an important lesson in not getting too stubborn. The market is clearly still in a longer term uptrend, so trade the price action, not the conjecture. Just be aware of what macro factors are driving the market (Fed Policy, QE, Buybacks, etc..) and be cognizant of when those factors are changing. The fed is likely to end QE in October and sooner or later the market is going to begin discounting that.
Conjecture aside what can we say about the technical picture of the market? On the SPY we have SAR Resistance, Under the Pivot, MACD cross, ADX Bearish cross, RSI neutral although a cross below 50 would be considered bearish. Price is still above the cloud which is bullish but a move down to S1 or the lower BB would not be out of the cards. The risk to bulls is a fast trip down to the 50day MA or lower. The risk to bears is another explosive V shaped rally up to new ATH. I remain with a bearish bias and think that Risk/Reward of initiating new long positions at these levels is unfavorable but the market does what it does and nobody can predict the future. Good Luck and make some money next week!
R. J. Sullivan IV