Going long still seems the way to go

Financial Times

It doesn’t matter how bullish investors are, the market does not usually go up in a straight line for an extended period. The recent grind higher for the S&P 500 may therefore be stretching its luck. By Monday’s close the benchmark is up 100 points, or 8 per cent, since the turn of the year without any pullback worthy of the name.

Chart

But this has left the 14-day relative strength index flirting with overbought territory above the 70 mark. Indeed, it has been about this level for much of the past two months. The past two times such sustained optimism was evident it resulted in declines for stocks. After April 2010 the S&P fell nearly 7 per cent in a few weeks. February 2011’s RSI peak triggered a 6 per cent, three-week retreat.

Investor wariness about these technical issues may partly explain why the Vix, Wall Street’s “fear gauge”, is reluctant to stay below 17. Traders are paying up for puts to hedge long positions.

Yet, this doesn’t mean the rally can’t continue. Bullish investor sentiment indicators are not at extremes and as Strategas research notes, new 52-week lows for stocks “are virtually non-existent”, making it hard to make money going short.

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