How High Can The S&P 500 Go Is Not The Right Question

What can budge the markets off their current course? Most traders don’t want a budget— they want a derailment. All the rumors were about raising rates earlier than expected, but nothing from the Fed and its dovish new chair indicate that will happen. Low rates seem to be here to stay and the S&P 500 couldn’t be happier.

The S&P has gone further than anyone thought and it still has more to go. At the same time, the Volatility Index (CBOE:VIX) is trading 10.50 on its way to 9.50. As this happens the risk goes up.

Friday the the Dow and S&P pushed to new record highs. Part of this had to do with the June Quadruple Witching and the other and maybe more prominent reason was the central bank’s continued accommodation. The Dow Jones Industrial Average (^DJI:DJI) rose 25.62 points or +0.2% to 16947 taking out its old record high of 16945.92 set on June 10. The S&P cash rose 3.39 points to a new record close at 1962.87. The NASDAQ Composite closed 8.71 points high to 4368.04.

There is a growing consensus that the Federal Reserve will remain accommodative despite the continued tapering of its stimulus program and comments after this week’s FOMC meeting reinforced that idea.

Most traders we talk to say it’s been smooth sailing and right now they do not see anything that could derail the the Fed’s plan. Traders feel the Fed will continue to provide support for the economy and that the current path of the stock market may continue right into the end of June and into July.

When we asked Brian Shepard (CME IOM member SHIPS ) he said “Let the S&P pull back and I see no reason why we can’t see S&P 1980 to 2000.” A well known DAX trader we follow said he thought the DAX had “another 200 points on the upside” before it breaks 1,000 points and said the decline could come in the next 10 days to two weeks.

How high is high?

At some point the stock market will correct but as the Fed continues its tapers the S&P continues to make new high after new high. Last week the Russell 2000 gained 2.2%, its largest gain since April.

The S&P has gone 45 straight days without closing a full percentage point either up or down, the longest such stretch since 1995 and dovish comments from Yellen during Wednesday’s Fed meeting helped fuel the fire.

From the street guy

One of the big things the market timers have missed is the trend itself. With no 10% correction in over 3 years they have continually pointed out spots to sell. From Robert Prechter to Tom DeMark to Bert Dohmen, they have all gotten run over calling a market top. Not once, not twice but many, many times.

Many of these big services have seen a big drop in subscribership. People that subscribe want actionable ideas. When a famous market timer says this is the top and it’s time to sell—and the markets just continue to go straight up it does more damage than just the loss.

The recommendation also throws the trader off the original direction of the markets. They start looking for tops as well. Instead of profiting from the rally they find themselves covering into the rally. It has cost a lot of investors a lot of money and disrupted their focus as well. Many investors are simply asking the wrong questions in the face of a straightforward trend. The right question is, “Is the trend up?”

And the answer is, “Yes.”

I know the markets are overbought and I have not doubt a “correction” could be around the corner but I don’t think it’s the Fed’s tapers that keep pushing the markets higher. It’s zero rates, and until that changes every selloff will be met with an even higher high.

The moral of the story is to continue to follow the trend. With the S&P up 190% since its March 2009 lows, we think when the time comes you will not only have enough time to get out of the way but also go for the ride down when the markets finally reverse. Until that basic rules apply—the trend is your friend.

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