I just finished our optionsource.net BreakOut Trader Analytics session where I spent most of the hour discussing why we are at a potential turning point in the stock market cycle. I'm not suggesting that we are facing a new bear market, but we are certainly overdue for a pull back and, more importantly, now is not the time to be chasing stocks.
Back a few weeks ago I suggested that we had an opportunity to catch a swing higher and referenced several technical indicators that lent credibility to that outlook. You can review that forecast by referencing my blog post titled Where Will The Stock Market Action Take Us This Week?.
Since then, the S&P hit 2000 this week, all be it on light volume and low momentum. While I believe that there is the potential for a continuation higher over the rest of the year, it is highly probable that there will be some healthy profit taking by money managers who have enjoyed substantial gains over the first three quarters of the year. Many bull market supporters on CNBC and BNN are suggesting that we are going to see money coming off the sidelines as result of having not participated in the the present rally. This may indeed be the case, but I believe that in order for investors to feel compelled to put that cash to work, they have to feel they are getting a bargain. After all, most investors and money managers look to buy low and sell high. So the question is...is this a "buy low" opportunity here? I think not.
Below is a typical diagram of a stock market cycle. Let me preface this by saying that I am not suggesting that we are in the final stages of an equity bubble. Rather, look at the below diagram as a reflection of a typical trend. Be it long term or short term, all trends have cycles.