The Bull in Headlights

May 23, 2018, 13:45 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Don’t be a Bull in Headlights! 

After the surge in the Dow Jones industrial average on Monday, many investors are back on the bandwagon.  Concerns have existed so far this year that did not exist last year, and the volatility in the stock market proves it, but sentiment became much more positive after Monday’s rally.  The question from here is will this rally continue, or will the concerns resurface and volatility kick in again?

First, although the Dow Jones industrial average was strong on Monday it is not strong on a longer term technical basis.  In fact, both the Dow Jones industrial average and the S&P 500 are in longer term downward sloping channels.

Additionally, the resistance lines of the longer term downward sloping channels in the DOW and the S&P 500 are currently being tested.  If these resistance levels remain intact both of these markets are likely to point to lower lows.

The stock market, overall, is therefore at an important inflection level.

If the Dow Jones industrial average and the S&P 500 begin to decline more meaningfully from the highs that were established on Monday (and that were retested on Tuesday) downside risk would escalate significantly.

Those investors who seemed to jump right back on the bandwagon after Monday’s increase are very much like a Bull in Headlights.  They are engaging bullish positions while the market tests longer term downward sloping resistance lines, and right before the worst season of the year for the stock market.

Not only is summer one of the worst times for the stock market historically, but the combined efforts of FOMC and the ECB are going to create a significant drain on liquidity in July.  The changes at the central banks have already started, and they are no longer adding liquidity to the global Financial System.  They are now a drain on liquidity and that will get materially worse in July.

Those investors who recently became bullish because the Dow Jones industrial average surged on Monday should be very careful.  If the market doesn’t follow through it is going to fall aggressively.

Don’t be a Bull in Headlights! 

Be proactive, manage risk, and neutralize portfolios that are designed to buy and hold. 

See how we do that.

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