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Stocks Continue Rocketing Higher

Rocket Man – Elton John [Click to listen]


I have an interesting chart for you today. For those that have taken a statistical methods class, you are familiar with the concept of standard deviations. The chart above is based upon standard deviations and it graphically depicts the percentage of stocks trading two standard deviations above their 40 day moving average, and compares it to the S&P 500 as well as to its own moving averages.

This chart is pertinent because it shows us that the last time this indicator was this high (in mid-May) we experienced a bit of a correction. Also, if you look at a longer-term version of this chart (I looked back 20 years) these two readings are the highest available.

It is not unreasonable to see why the reading is so high, particularly given the magnitude of the crash we experienced and the amount of ground most companies had to make up. However, caution would indicate that we could easily see a bit of a pullback in prices in coming trading sessions.

We have several new clients who are sitting mostly in cash at the moment as we wait for opportunities to deploy the cash. This will be good news for them if we pull back 3% to 5% – however, given the massive liquidity floating around the financial markets, any downside should be pretty well contained. So, we view any pullback as a buying opportunity at this point in the market.

Remember, in a previous post I mentioned that we were looking at 1004 to be a bit of a resistance level for the S&P 500 Index (its currently around 1001) as that was the level prior to the Lehman Brother’s bankruptcy which precipitated the crash. After that is worked through, we have a target of 1050.

These are fairly unprecedented times as most investors did not experience the crashes of 1987 and 1989, let alone the grinding sideways valuation crash of the 1970’s, in any meaningful way. Keep visiting this blog and we will help you read the market so you can navigate your way though it as best possible and tell you what we are doing with our clients’ portfolios.