Market Watch: Did the Parabola Just Break?

Posted On January 31, 2018 12:55 pm

The stock market had been on a parabolic move higher, but the back to back declines of Monday and Tuesday, the first two consecutive down days in over six weeks, may have broken feverish buying. Today’s market watch is going to examine this broken trend in more detail.

For my part, the breaking of what had become a near vertical move up prompted me buy some SPY put spreads, with a near -term down side target of the 50 day moving average at the $278 level.

But Shawn Langolis at Market Watch doesn’t think this parabolic move should make investors nervous.

According to official Market Watch records, this marks the 698th time that very question has been asked in this space since Trump took office. But it’s hard not to ask it again, considering the “parabolic” move the market is making lately.

“U.S. equities have already gained more in the first few weeks of January than they do in many full years,” writes Urban Carmel of the Fat Pitch blog. “The equity market is undeniably hot, and that can often lead to a period of retracement and decline, but trends weaken before they reverse, and this one has not shown any sign of weakness.”

To bolster his upbeat case, which earned our call of the day, Carmel pointed to this set of charts from Fundstrat’s Tom Lee. He gathered a sample of eight other times the S&P SPX, +0.14%  showed this kind of ”parabolic” breakout:

Carmel pointed out in a weekend post that the S&P ended higher after the next 12 months in six of these eight instances.

“In other words,” he wrote, “expecting the current torrid pace to continue unabated is low odds, but the gains so far in 2018 are unlikely to mark a significant top.”

But why? “You might rationally presume that, because the stock market is known as a discounting mechanism, this surge to unprecedented valuations reflects a surge in their respective businesses,” says Jesse Felder. (Yes, I might.) “In that case, you would presume wrong.”

Felder shows how the average sales growth for these four has actually done just the opposite, yet the stocks keep moving higher. He says one driving factor is that dividend-focused ETFs have been buying them up like crazy.

Let the good times roll, eh?

 Related: Learn Why Now is the Best Time to Buy Capital One

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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