The DOW, S&P 500, NASDAQ and the small cap Russell 2000 index reached their perspective all time new monthly closing high at the month end of April, which left the market in a very strong technical position. The bullish momentum is not showing any signs of weakening. The earnings season has exceeded expectations.
Fundamentally, the monetary and fiscal support for the bullish trend are not going to end any time soon. Technically, the market is very overbought and getting tired. Because of this strong technical position at the month end of April, the market is compelled to make a new high in May. A new high in May would warn a correction to follow.
In the DOW weekly chart, you can see the DOW has a hard time to have a clear break away from the top trend line. It broke out the line three weeks ago, then it came back hugging the line last week. It is showing the signs of fatigue. The weekly cycle oscillator has turned down as well.
In our timing model, it calls for a possible top on May 18th. We would like to emphasize that this top is a temporary top, not a final top for the bull market. It is also wise to wait for confirmation, never put on trades without technical confirmation. In a bull market, it is best NOT to take sell signals because those sell signals normally don’t have lasting downside momentum. The dip buying crowds make the shorts suffer terribly in a bull market.
If you are a long term investor, you should ignore this type of short term tops and keep your investing positions intact. A true bull market rally typically last minimum 37 months, that’s more than three years. So please don’t sweat the small trends in your long term portfolio.
Over the weekend, it is revealed that the famed investor Warren Buffett has most of Berkshire’s portfolio tied up in just 4 stocks. What about diversification? None. This directly contradicts what the media has been preaching about diversification’s role to lower risk. We believe that diversification has been over emphasized to the retail investors because the Wall Street believes the retail investors don’t have the abilities to pick individual stocks. True, it is difficult to analyze individual stocks. But it can be done, perhaps exceedingly well.