Why The Rally Isn’t Over… Yet
Let me share a couple of headlines with you from the financial media this morning:
Earnings Season May Challenge U.S. Stocks
…Survey Indicates Stock Market Rally About to End
Much of US stock rally might be over for 2012
Are we getting a common theme here? Seemingly out of the blue, investors are expecting the market to top in April. But I’m not buying it — and you shouldn’t either…
There’s nothing the financial media loves to do more than react to the market. Unfortunately, it’s not just the financial media that loves to do it; so do the talking heads that grace TV news and opine about Mr. Market’s innermost feelings. Looking at the news coverage of the stock market in the last couple of weeks, it feels like stocks have pulled back pretty dramatically, right?
If you look closer, you’ll see that it’s not the case. People are just reacting to a couple of days of stock selling:
Yes, stocks have slowed down a bit in the last few weeks, but let’s not forget that we’re coming off the heels of the best first quarter for stocks in more than a decade. And while the S&P 500 has pulled back in the last couple of weeks, it’s not flashing any sell signals just yet.
Looking at the S&P’s price, there are a couple of things that should stand out first and foremost. One is that the latest pullback hasn’t exactly been the “massive selloff” that the media has been exclaiming — the market is merely trading sideways.
The other is that the primary uptrend in the S&P is still intact. We’re testing trendline support right now, but this trendline has already withstood three other major tests since the rally started.
Another metric worth watching is the 14-day RSI graph at the top of the chart. RSI stands for Relative Strength Index — it’s a measure of momentum. Although momentum has been declining in the very short-term, we’re coming in within a few points of the neutral 50 level in RSI right now. The last time we hit 50 was back in March, just as the S&P started on the second leg of its rally…
And you guessed it, scores of investors were sure that we’d hit a 2012 top back in March too.
At this point, the technical outlook of the S&P 500 still looks cautiously optimistic.
It’s way too easy to let emotion rule your trading in markets like this. That’s why it’s crucial to keep looking at the market’s most recent moves in context. Don’t get caught up reacting to the last few trading days. Looking at a four to six month chart of the S&P 500 at the start of every trading week is a good way to avoid getting caught up in the media’s echo chamber.
You can pull up a free, live copy of the chart I showed you by visiting StockCharts.com There, you can annotate and analyze the chart to your heart’s content. I’d suggest bookmarking the page — it’s worth referring back to each Monday to get a clearer picture of what’s happening on Wall Street.