With the market hitting new highs (the Dow) or closing in (for the S&P 500), the topic du jour for the past couple of weeks has been whether or not this rally can continue. In my last post, I noted that JNK, the SPDR High Yield bond index ETF, was dropping while the S&P 500 was continuing upward. Since JNK and SPY have a high correlation (they tend to move in the same direction), something was due to give. Either SPY was due a selloff, or the correction in JNK was done and it would soon follow SPY up. As shown in the chart below SPY, (the red and green candle chart) has moved on to new highs since the downturn started in JNK (shown by the vertical white line). SPY did pause a bit to digest the sequester non-event, but it didn’t even drop to its support level, shown by the longer up sloping white line. And, in fact, JNK did resume a modest uptrend: Chart: FreeStockCharts.com Bottom line: SPY appears to have shrugged off two negative inputs, a drop in high yield bond demand (lower price for JNK) and completely shrugged off the sequester. This leads me to my next market indicator to watch. The market seems to go through four distinct cycles:
- Up on bad news
- Up on good news
- Down on good news
- Down on bad news
For now, my strategy for my portfolio is to stay bullish. While I personally can give a pretty ugly laundry list of reasons the market could (or should) go down, for now I’ll assume the market is smarter than I am, and not fight the trend.
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