The uptrend out of the October 15 low just can’t be stopped. On Monday, amid light volumes ahead of the Thanksgiving holiday, the S&P 500 notched another record high by climbing 0.3% to close above its five-day moving average for the 27th consecutive session.
That’s the longest such winning streak since March 1928, which marked the start of the great 1929 stock market rally that, when it crashed back to earth, was the genesis of the Great Depression.
Back on October 16, just one day after the market bottomed, I wrote that the market was overdue for a rebound rally and recommended my Edge Pro subscribers book profits on positions like calls against the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which gained 551% during the early October decline.
But what we’re seeing now is simply beyond all expectations. The big question is: Can it continue? And if so, which areas will be leading the way higher?
Two main factors have driven the rebound. The first is the receding fears over an Ebola outbreak here in the United States. Plasma donations from survivors have been effective in curing cases here, taking the string out of pandemic concerns. Second were comments near the October 15 low that the Federal Reserve could restart its bond buying stimulus if the U.S. economy lost momentum.
This has since been bolstered by aggressive new stimulus action by the Bank of Japan, the first interest rate cut in two years by the People’s Bank of China, and indications that the European Central Bank is moving closer to an outright sovereign bond buying stimulus of its own. Overall, despite the end of the Fed’s QE3 bond buying program in October, the bulls have been provided with plenty of cheap money with which to whet their appetites.
Other catalysts include a lack, so far, of political bickering in Washington over the need to pass a new budget resolution by December 11 (given Congress is out for the Thanksgiving recess) as well as high expectations heading into the holiday shopping season (given the drop in gas prices to levels not seen since 2010). And let’s not forget that this is seasonally one of the strongest periods of the year for the stock market.
How to Play the Stock Surge
After riding the initial wave in late October and early November, I recommended subscribers pull out over the past week as valuations become rich, short-term technical indicators become overbought, and sentiment goes off the rails heading into what should be a much more difficult December.
For one, OPEC will be meeting on Thursday, during the Thanksgiving holiday, and will need to cut production levels or else face the growing threat of an oil price collapse. A rebound in crude oil, which would be encouraged by reports Russia could join an attempt to bolster energy prices, could be considered a negative factor since it would weigh on the dollar and pinch those popular yen-carry trade positions hedge funds have been relying on.
Two, next Friday’s jobs report, if it keeps up recent momentum, will put pressure on the Federal Reserve to start hiking interest rates in early 2015, months ahead of Wall Street’s expectations. Any rebound in crude oil prices would encourage this as well.
Three, angered by President Obama’s executive action on immigration, it’s likely that Republicans in Congress will try to retaliate using the budget process in early December. This will bring back all those concerns over the debt ceiling, government shutdowns, debt defaults, and credit downgrades that have been seen in prior fiscal fights.
And finally, it’s hard to ignore the warning signals coming from the bond market with long-term Treasury bonds inching higher while high-yield corporate junk bonds inch lower. It seems like the fixed-income market is worried about higher interest rates coming sooner rather than later, something stocks are completely ignoring at the moment.
With the risks so high, and the bulls foaming at the mouth, I believe caution is still warranted. Consider trimming profits on the riskiest positions, raising a little cash, and looking at adding a position in Treasury bonds via funds like the iShares 20+ Year Treasury Bond (TLT), which is up 0.3% for Edge subscribers since added on Friday.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
