The market continues to act well. Although we technically closed up for the week, I don’t really look at the week as positive from a performance perspective, but rather positive from a consolidation point of view. We have sort of a resting period occurring which will lead the way to better opportunities shortly.
Many times when the markets get out of whack (one group of stocks performing significantly better (or worse) than the others, there comes a point in time where the indexes eventually have to get back in sync with each other. As you know from previous posts, the S&P500 and Dow Jones has been basically flat to slightly down since the beginning of this year, while the riskier Russell 2000 and Nasdaq fell pretty substantially (down 10%) over the same time period. This divergence between the indexes eventually needs to be dealt with, and this is what I see occurring now.
Over the past 2-3 weeks, we have seen the stocks in the S&P and Dow make very small gains, while the Russell 2000 and Nasdaq stocks have been on a tear trying to catch up. So, we have the larger caps basically waiting, while the smaller caps are quickly trying to come back. This is very productive behavior.
What I expect to happen from here, is that we will first need a very shallow correction, but not anything to be afraid of. Just a buying opportunity. Basically all the data points look very strong, but we have quite simply moved up too much too quickly in the smaller cap stocks and we just need a short time to pause and build confidence again. There are many buyers that still want to get into the riskier assets, but are waiting for a pullback since the prices have gotten a bit elevated at the moment. We have what is called an “overbought” situation, and we simply need to pullback to ease this tension.
Once this occurs, (which I expect to start next week and last 1-2 weeks), things look quite positive from here (barring any unknowns). I expect over the next month or two that we will be into new high ground on all indexes.
Bottom line, it appears we are seeing very positive consolidation occurring in preparation for a longer term move up. Our short term indicators are looking a bit stretched and indicate a mild pullback is imminent, but medium and longer term … everything still looks honky dory.
For now, we stay fully invested with little cause for concern.
Hope you have a wonderful and safe weekend.
Resnn Investments, LLC
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