Breadth vs. Sentiment

There is a point when your team is having a winning season—a record-setting one—when you need to take a step back and appreciate the ride.

This is how it feels with the stock market right now!

You might have seen this chart, but here is the performance of the S&P 500 through October compared to other years going back to 1990…

We are looking at the third-best year-to-date performance over the last three decades.

In July, the technology sector reached new all-time highs, and since then, many other sectors

 have also reached new all-time highs.

Last week, the S&P 500, financials, utilities, industrials, real estate, and consumer discretionary reached new all-time highs. In September, consumer staples, healthcare, materials, and consumer discretionary also reached new highs. The only group currently struggling is energy.

We have also seen the rally expand across market capitalization. The mid-cap S&P 400 recently hit a new all-time high, and the Russell 2000 is knocking on the door.

We are seeing new highs in almost every sector across every market capitalization. That is powerful stuff.

This is particularly impressive considering the "news" that the market has been able to shake off.

Our thesis is that the macroeconomic environment is calming down, and we will see less volatility in those reports. Most recently, we saw a hotter-than-expected inflation number that barely moved the market.

From a geopolitical perspective, though, the environment remains quite volatile. We are also entering the final weeks of a contentious Presidential election.

You can’t mention the strength in the stock market without critics quickly bringing up the record budget deficits and concerns about the dollar.

Despite all of these obstacles, though, the stock market is (again) performing at a record high.

Our view on what to do here is pretty simple – the trend is your friend.

We are in a strong market uptrend going into the strongest seasonal period of the year. If there ever were a time to be aggressive in the stock market, this is one of the best set-ups you are going to see.

What does this mean for your TRADING and INVESTING?

We are entering the most attractive time of the year for TRADING strategies – earnings season. We think there are going to be quite a few great companies that will report solid results yet trade off strongly due to a miss on a minor metric.

We think you can be even more aggressive than usual in pursuing these opportunities.

Again, our strategy is NOT to buy stocks that have been weak for an extended period or "catch a falling knife.” Our approach is to buy weakness in a stock that has shown considerable strength.

With a strong market background, these kinds of opportunities are even better.

From an INVESTING perspective, it is a little bit more challenging.

Many investors are sitting on big gains on their long-term positions. Our view is that doing little right now is the best course.

Most of the best ideas are very extended. Investors who embrace tactical trading (like us) might want to take some profits. Most investors, however, should probably do nothing.

We also think that it is not a great time to take on big new positions on the INVESTING side if they are extended.

We can sense that the market will go higher, but we also feel that full entry points are not attractive right now.

This brings us to our biggest concern right now – SENTIMENT.

What investors out there don’t know all the data we shared above or disagree?

We saw this recently in the CNN Fear and Greed Index. Here is the reading from the end of last week…

Earlier last week, it hit the highest levels it has seen since March. It is also around the levels it was at in July of this year. This indicator has been a decent contrarian indicator in the past few years.

Here is a chart of the S&P 500 over the last year with the moving averages…

You can see how extended it was back in March and July. We think we are in a similar position right now.

As a result, our year-end outlook is quite positive, but our near-term outlook is cautious. Be TACTICAL.

When everyone agrees with you on something, we feel you are often right eventually, but the journey there can be bumpier than expected!