There is always an exception that proves the rule, and this month has certainly been one of those, as anyone who did indeed ‘sell in May & go away’ – a famous stock market maxim – would now be earnestly regretting this decision, and no doubt rushing back to buy into the current bullish trend.
Indeed with many market commentators now attempting to call a top to this current trend, and some even suggesting that this market simply ‘cannot go any higher’, perhaps the time has come to take a step back and take a longer term view. As a long term stock investor who re-entered the market back in 2009 when the UK FTSE 100 was at 4900, such comments do need to be put into context. Furthermore, to quote from The
Reminiscences of a Stock Operator (the thinly disguised biography of Jesse Livermore), “Remember that stocks are never too high for you to begin buying, or too low to begin selling”. Another quote from Jesse is “Never argue with the tape”, and with this in mind, what is the tape telling us today?
Let’s start with the daily chart of the YM, and ironically it was the first couple of days in May which provided the trigger for the current trend higher which has extended, almost unbroken for the last three weeks, and has seen the index break through 15000 to sit currently at 15371 on the June futures contract.
This breakout took the index away from the extended congestion phase of March and April, and which has now provided the well defined and solid platform of support in the 14300 to 14800 region. As we can see on the left hand side of the chart, this area of congestion is extremely well delineated by the volume at price histogram with two, above average bars, and it is these which will provide a solid platform in the event of any pullback.
Next, moving to the more traditional volume and the ‘tape reading’ aspect, the price action on the index has been rising on steady and consistent volume with no extremes, one way or the other, and certainly no evidence to date of any ‘selling climax’. And if and until this occurs, then the current bullish trend is set to extend further. In other words, there are no signals from a volume price perspective to suggest that the current trend higher will not continue further.
Moving to the fear index, aka, the VIX the overriding conclusion to draw from the monthly chart is that whilst the VIX is certainly low, and therefore suggestive of a possible reversal in equity markets, I would draw your attention to the left hand area of the chart which represents a four year period during which the VIX remained between 10 and 20. This period covers the bull run from 2003 to 2007.
This perhaps puts into context some of the comments in the media, and also gives a view on just how long the VIX can remain “over extended” in one area or another. What is also interesting to note is the consequent speed of reversals from sharp sell offs as opposed to extended periods of bullish trends. In other words, markets go up in stairs but down in escalators.
By Anna Coulling