There have been few catalysts as bullish for U.S. equities than sell offs of single digits percentages off of new all time highs. It has been a wildly profitable strategy the past few years to buy your favorite stocks on these little dips. The four year chart below is the product of unprecedented monetary policy measures and aside from the 20% peak to trough decline in 2011, sell offs from highs have averaged in the mid single digits before V reversals that all culminated in new highs. The tightness of the uptrend has been uncanny:
Despite the extreme volatility over the last six to nine months in commodities, currencies, bonds and foreign stocks, U.S. stocks have not been bothered at all, now just 2.5% from the all time highs made last month. And frankly the next move in the very near term seems kind of obvious. A quick gander at the one year chart of the SPX below shows the next real support at the early May low of about 2048, just above the 200 day moving average (purple line, circled), while the nice round number of 2000 (green line), down about 2.5% from the initial technical support will be the battle ground area where the “buy the dip” crowd will need to defend to keep the trend intact:
A move back to 2000 from the all time high in May of 2135 would represent about a 6% decline. In the last two years there have been 10 sell offs from new all time highs that have resulted in losses of greater than 3%, the average decline peak to trough has been about 5.4%:
A sell off back to support would be run of the mill for this bull market, and might be the very thing to cause this range-bound market to finally breakout in the weeks/months to come. The reason is simple, a 5% decline would cause some complacent longs to panic, only to have them jump back in prior to making new highs for fear of missing a breakout.
Regular readers know that I have not been a fan of committing new capital to equities, and have positioned for a pull back to 2000 in the SPX in the coming weeks (read New Trade $SPY: A Butterfly and a Spyder). I feel next week’s Fed meeting and month end deadlines with Greece’s debt repayments could be the spark to cause a test of downside support. But as long as our economic data doesn’t take a steep nosedive (May jobs data & April revisions suggests not) I would also be interested in buying stocks that display good relative strength at that support level which could coincide with capital inflows at the start of a new quarter in July.