Dear Prudence

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Last week sure was a lot more fun than this week. It seems that every day is guaranteed to bring a new lifetime record in the S&P 500 and the Dow 30. What stung particularly badly today was I was short a number of retailers (such as LTD and ROST), and that caused some damage I’d rather have avoided. Things are stretched, but nowhere is it written that they can’t get more stretched.

I’ve noticed the cockiness of the bulls is following the narrative that down-markets have been rendered a thing of the past. Looking around, it’s hard to argue with this; the last meaningful down-move we have was twenty months ago, and it feels like it’s been twenty years. Even bad economic data, such as the bad jobs report last Friday, is reason for the bulls to celebrate. It’s enough to cause one to throw in the bearish towel and just buy like everyone else, which is a big reason why things are going up the way they are.

I would offer these charts, however, to urge some caution, even if you are feeling randy about buying everything under the sun. The Dow Utilities is at the uppermost levels of a long-term ascending channel; even if the uptrend remains intact, a meaningful relaxation of prices here seems in order.


The semiconductor index is still cleanly within the confines of its symmetric triangle, and the most likely next direction seems down.


The Russell 2000 has, in spite of this week’s strength, still been respectful of both its channel and its broken trendline, suggesting genuine vulnerability at present price levels.


And lastly, the ES is very close to the psychologically-important 1600 mark as well as its own wedge. Cruelly, it did break its pattern last week (tinted in green), only to flip around the push back into the pattern again, breaking the hearts of bears near and far.


For my own portfolio, I have retreated back to a 60% commitment level and no large positions. Although “waiting it out” for the rally to exhaust itself is in itself exhausting, I’d prefer to do that rather than throw money at long positions based on nothing more than the premise that the government simply won’t permit stocks to go down ever again. If that were so easy, it would have been done throughout all modern human history. It isn’t different this time, no matter how badly you want to believe that it is.