Since our last update very little has changed. Bulls continue to be in control. The current Bull run up is still extremely strong, this means that the next larger pullback will likely be bought once again. We still have not even seen a range phase which is normally the first step of a Bear market. So even a very large 10 – 20% pullback, if it occurred, will likely still be bought.
On the fundamental side, we continue to see GAAP earnings increase. However, we are still below the 2015 high while the market is significantly higher. This in turn means that equities are pretty expensive.
Bulls are still in full control. As we mentioned Bulls took back the ball in 2016 and have hogged it ever since. Since our last update, we hit our bullish target almost right on the nose at 2400. This was a great area to take some profits off the table, and it is normal to see a pullback after such a climatic new high. The run up to the March 1 high was very strong, so in theory it is safer to be a Bull, at least for at-least the next 3-6 months. This is because the 6-8% pullback (which might have begun already) will eventually be bought. Then we will likely see a retest of the all time high.
On the fundamental side, we saw a nice uptick in GAAP earnings for the last quarter. We need to see this continue in the market to keep pushing higher and to be able to support elevated stock prices.
The bulls took back the ball in the second half of 2016 and have since exceeded the high of the 2 year range. This currently makes being a Bull safer. Since we know technically, the next pullback in the medium-term should be bought. At that point we can reassess our positions.
In the long-term, however: the breakout has been about average in strength. Bulls need to continue to push past 2225 and break the red trend line on RSI to leave no hesitation in the chart pattern. That would clear the way to the bullish target (2400).
On the Bear side, to be taken seriously in this time frame, they need to first break back into the old two year range.
On the fundamental side, we can see that valuations continue to rise while GAAP earnings are flat to down for about 2 years now. This same issue holds true on a number of different valuation techniques including: PB ratio, Price to Sales, etc. This divergence is not sustainable in the long-term. In the last quarter, we did see the first tick up in almost two years. We need to wait for more information to see if this was just a blip.
The bottom line is: for the medium term+ we think it is safer to be a bull. Caution is still needed, however, if we are thinking about putting on any new long term positions. One big red flag is: most of our momentum indicators are nowhere near as strong with the current bullish push as they were in 2010-2014. This is a clear signal that the old bull is slowly tiring.