Now is not the time to chase.
Over the past month, the S&P 500 (SPY) has rallied 23%. The tech-heavy Invesco QQQ Trust (QQQ) has performed even better, surging 29% off its April lows.
Many leading names have returned multiples of what the indices have delivered.
It’s been a textbook “lockout rally.”
That’s a great sign for the overall market. It makes me think we’re in the early stages of a new bull market.
But rallies don’t last forever. Eventually, they run out of steam.
There are two ways this can play out…
The market can correct through price. In other words, stocks could pull back. Stocks can also correct over time, meaning they could trade sideways for a bit.
At this stage, both of those scenarios would be perfectly normal for a couple of reasons.
One, the market is extended. The number of stocks in the S&P 500 above their 20-day moving averages has spiked from less than 1% at the April lows to more than 86% currently.
The other thing that has me leaning on the cautious side is the Volatility Index (VIX). The VIX has plunged 71% since early April.
The steep drop off in volatility has been a major tailwind for stocks. It’s made for excellent trading conditions.
However, the VIX is now sitting at a major support level, where buyers are stepping in. If the VIX climbs off this level, stocks may pull back. At the very least, the market probably gets a heck of a lot choppier.
Source: StockCharts
If you’re going to put new capital to work, I suggest being extremely selective.
Don’t blindly buy any dip. Instead, buy stocks that have pulled back into support and are finding buyers.
I would also suggest steering clear of “catch up” plays. Instead, focus on positioning yourself in leading names that are on sale.
In my Express Trader advisory, I’ve told my readers to exercise patience despite the more bullish outlook. We’re only buying stocks with strong relative strength—names that can hold their gains even if the market pulls back.
Every Monday, I share my top three trades based on where my PRO Meter suggests the market is headed. This proprietary indicator helps me determine whether to lean in and play offense or take a more defensive position.
You can get access to my newest picks here.
Justin Spittler
Chief Trader, RiskHedge
