Time Your Next Big Buy With These 3 Charts
You look like you’re ready to puke your guts out this morning…
Motion sickness got to you again? I guess the stock market has you reeling. I feel for you. It’s been a tough couple of months…
The major averages cratered in August, chopped traders to bits in September, and staged an epic rally in October. And even after all the noise, panic, and jubilation, Mr. Market is right back where he started three long months ago. No wonder you’re looking a little green in the face.
That’s what happens when you’re forced to endure choppy trading conditions. Investors get too bearish. Then they get bulled up too quickly. No one wins. Everyone complains.
So today I want to take an objective look at the stock market as it standsright now. You’re going to see three different charts that show you exactly what you need to look for before making your next buy or sell.
Let’s get started…
First, I want you to take a look at the S&P 500’s breakout from its recent lows:
After all of the recent turmoil, the S&P 500 has been surprisingly resilient. An early October breakout led to double-digit gains in a matter of weeks. And a quick retest of the breakout zone, if it holds, could prove to strengthen this rally into year’s end.
Despite the market snapping back to attention, there are still some things we would like to see before sounding the all clear.
First is breath. You’ve probably heard a lot of complaining about market breath lately — and it’s justified. Throughout the year, the major averages have been propped up by a handful of outperforming mega-caps like Amazon and Facebook. But when you look under the hood, you’ll see that most stocks aren’t rallying.
While the S&P 500 has reclaimed its 200-day moving average, only about half of its components are trading above their respective 200-day moving averages. Compare this number to late May, when roughly 70% of S&P stocks were above this critical long-term moving average…
Heading into December, we’d like to see more participation in this rally. If the average stock can’t get it into gear, the October rally and a fresh shot at new highs could be in jeopardy.
Speaking of breath, we’d like to see some stocks other than the big, popular names gain some traction before the end of the year.
That brings us to the small-cap Russell 2000 index. The Russell has dragged woefully behind its large-cap cousins. That’s nothing new. But the gap has become more pronounced in recent weeks:
The October rally is where the S&P began to really separate itself from the Russell. While large-caps jumped off their lows, small-caps managed a sluggish comeback at best.
But all is not lost. We’ve seen hints of a small-cap resurgence this month. In fact, thanks to a couple of big days in early November, the Russell looked like it was finally ready to close the gap. We’re still waiting on some meaningful follow-through.
Ultimately, a little small-cap participation should help broaden out this rally. The Russell has under-performed the S&P 500 by more than 10% over the past 24 months. Now, with seasonality on its side, a sustained rally from this year’s forgotten stocks could be the shove the market needs to get back on track.