As trading action has slowed down thus far in August, I took some time yesterday afternoon to reflect on 2013’s price action in U.S. stocks. And most notably, the market’s upward movement — which has been nothing short of pristine — has led to both a sense of complacency on the part of the bulls, and fear that even the slightest market correction will immediately lead to some sort of meltdown.
It’s a strange dichotomy of feelings (and that fear of a slip might be what ends up pushing markets higher for years to come), but it’s difficult to blame the bulls for feeling this way — after all, the lost decade of stock prices still is a fresh memory.
The question I’m pondering at this juncture is one of timing, for timing is everything. While as a trader I can be quick and opportunistic, getting in and out of the market, it’s nevertheless still important to have a game plan on the medium-term trend of the markets.
For a little context, let’s look at the sectors of the S&P 500 — specifically, the consumer discretionary group. The S&P 500 is up roughly 155% from the 2009 lows, which logically means that out of the 10 sectors, some must be up more and some less than the index. Of the 10 sectors, only the financial, material, energy and utility sectors still remain below their 2007 highs, although they also are meaningfully higher since 2009.
The financials are up roughly 240% since 2009, the transports over 200% and the consumer discretionary sector — as measured by the Consumer Discretionary SPDR (XLY) — is higher by 280%. The below multiyear chart of the XLY shows this well. Note how it has eclipsed its 2007 highs long ago:
What I am concerned about over the medium-term of two to three months is the steepness of the slope on the long-term chart above.
On the chart below, note the constantly increasing slope of the rally off the 2009 lows, which recently has moved the sector out of the up-sloping wedge in which it has been trading in for so long.
The trend is your friend until it ends, as the saying goes.
The question is, is it really so difficult to imagine a 10% market correction in something that is up 280% in a little more than four years? I would argue it isn’t — especially as we slowly head toward a seasonally more volatile period in September/October.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.