“Tonight, old man, you did it!
You did it! You did it! You said that you would do it,
And indeed you did. I thought that you would rue it;
I doubted you’d do it. But now I must admit it
That succeed you did.”
. . . My Fair Lady (You Did It)
Well, “you did it,” as the senior index followed most of the other indices to new all-time highs. We have repeatedly written that this was going to happen given the Advance-Decline Line’s continuing new highs, as well as the stock market’s strong breadth. As often stated in these missives, with many of the indices trading to new all-time highs over the past few months it was just a matter of time until the D-J Industrial Average (INDU/26,743.50) would play catch-up, and catch up it did last week. In that upside breakout the DOW confirmed the D-J Transport’s (TRAN/11,532.56) new highs that have occurred over the past number of weeks, thus registering a Dow Theory “buy signal” (see chart on page 2). All of this was foretold by the January – February “set up,” which we wrote about back then.
To repeat ourselves, our models said to raise some cash in late January. Those signals were followed by an 11.8% pullback in the S&P 500 (SPX/2,929.67) culminating with the “selling climax” low of February 6, 2018. Then we got a failed “throwback” rally leading to another selloff into the undercut low of February 9, 2018. For those that do not know what an undercut low is, it is when the index/stock trades slightly below a previous significant low. In this case it was the selling climax low of February 6 followed by the February 9 slightly lower low (read: undercut low). Folks, a tradeable bottom does not get any better than that; it was one of the most classic bottoms there is! Such chart patterns typically cause technical analysts to warn that another whole new “leg” to the downside is coming. However, over the years we have observed numerous major lows have been made this way, which is why we recommended buying the February 9 undercut low looking for new all-time highs in the months ahead. While many pundits thought us to be crazy, truly believing another downside leg was in store, or at best the market was going to be range-bound, we thought otherwise. Since that undercut low the SPX is better by nearly 16% and has left the doubters scratching their collective heads. More importantly, the equity markets have left many of the “pros” scrambling to play catch-up and now that the averages have tagged new all-time highs there should be a rush to commit more cash. While this may not lead to a vault to the upside (more likely a grind higher) it certainly should contain any downside, provided there is not a “black swan” news event.
We have been bullish since October 2008, when most stocks bottomed, and we are on record back then suggesting the bottoming process had begun. Then on March 2, 2009, on Bloomberg TV, we stated that, “The bottoming process that began in October last year is complete this week and we are “all in.” Have we rebalanced portfolios, raised cash from time to time, layered in some downside hedges; yes we have, but it has always been within the construct of a secular bull market. Ladies and gentlemen, secular bull markets last 16, 17, 18+ years! So depending on where you want to count your “count” (October 2008, March 2009, or April 2013) this bull should have years left to run. So what’s driving it?