by Anthony Mirhaydari | February 27, 2014 4:49 pm
The bulls have finally done it: After repeated attempts going back to late November, they’ve managed to push the S&P 500 above 1850 on a closing basis to set a new record high. That ends three consecutive days of pump-and-dump action and pushes stocks up and out of a three-month-long trading pattern.
The catalyst for the move (surprise, surprise) was the Federal Reserve thanks to a big daily scheduled bond purchase as QE3 rolls on and the appearance before the Senate of new Fed chair Janet Yellen. Although Yellen didn’t say anything new of note — besides mentioning the severe winter weather that’s plagued parts of the country — and kept the tapering of QE3 on track, the market just tends to do well when the Fed is in the news. Thursday’s performance was no different.
But it’s not all sunshine and lollipops.
For one, breadth left a lot to be desired as buyers focused on a fairly narrow subset of the overall market, led by flashy moves in retailers like JCPenney (JCP) as well as homebuilders like Toll Brothers (TOL). There were just over 1,000 net advancing issues on the NYSE; well below the peaks of 1,750 seen earlier this month or the 2,000+ readings seen back in October.
Two, the CBOE Volatility Index (VIX), or Wall Street’s “fear gauge,” is meaningfully higher than it was back in November and December when the bulls were last trying their luck at the 1850 level on the S&P 500. That suggests many traders are feeling pretty nervous about the sustainability of the rapid rebound out of the early February low.
And they’re bidding up put option protection in response.
Also, money is flowing into safe-haven U.S. Treasury bonds, pushing down the relationship between high-beta or risky stocks in the S&P 500 and T-bonds to an extent not seen since the market was forming its terminal peak in mid-January. You can see this relationship in the chart above.
I’ve encouraged clients to take advantage of this via the leveraged Direxion 3x Daily Treasury Bond Bull (TMF), but the unleveraged iShares 20+ Year Treasury Bond (TLT) would do the trick too. I’ve also added TMF to my Edge Letter Sample Portfolio.
In addition, I remain concerned about the new bout of weakness hitting emerging-market stocks, with China’s Shanghai Composite in particular looking troubled.
Finally, market history suggests the breakout to new records won’t last. Through Wednesday, the S&P 500 had been rejected at the 1850 level three times in a row. That’s something that had only happened four over times in the last 30 years. After the other four, according to the folks at SentimenTrader, the market showed a modest upside bias over the short term before rolling over into losses over the two- to three-month horizon each and every time.
So stay skeptical and use the excitement to book profits in weaker positions.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended TMF to his clients.
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