The headlines continue to pontificate on the markets being overbought. In theory the concept of overbought markets makes sense… in reality, it is a substitute phrase for buyers beware. The current bounce off the June 28th lows has some worried relative to the new highs along with the 8% plus move in the broad indexes. It is a concern when markets move almost verticle in reaction to news, data and optimism. The challenge is not getting caught up in the hype of the media or the markets. Now is a good time to step back and evaluate what is driving the rise in prices. Even more important, is the catalyst or factor sustainable going forward?
S&P 500 index cleared the 2100 level to establish a new high and has rested this week near the 2170 mark and current resistance. The selling to the June 26th low came on the surprise vote for Great Britain to exit the Euro Zone alliance. Then after further thought, the consensus became it wasn’t a bad thing necessarily and the market reversed course. Following that epiphany, the economic data for Q2 started and surprisingly showed improvement for the economy and the outlook was positive. The next spark came from earnings which have proven to help both the financial and technology sectors move higher. Is it sustainable? Yes, would be the initial response as we update and watch the data going forward. A reasonable initial move for the index based on the break from the trading range would be 2185. From there it would need additional fuel from earnings, economic data or other catalyst to continue the climb higher. This could explain the near term congestion and digestion of the move to this point.

SP500

SP500
I don’t want to belabor this point, but we all need to step back, evaluate and then move forward based our predefined strategy and beliefs. The move above 2100 was the continuation of the trend off the February lows. Any positions taken should have been done with a defined entry, target and stop. As the position progresses we adjust the risk of the trade by adjusting our stop accordingly. Trading/investing is not rocket science. It is a simple process of developing a sound tested strategy that we implement with disciplines that become habits. This formula has worked for many investors and portfolio managers for decades. The challenge we face is first, have a defined strategy. Second, testing and adjusting it to fit our personality. Third, developing the disciplined habits through practice. Fourth, not peaking over the fence to see if the grass is greener on the other side.
Managing money is a science project where you, the investor, must learn the strategies that fit your personality and then practice to develop habits that will allow you to manage your money based on you, your goals and your discipline.