prices reached new highs last week as headlines warned of a weak
. This might be an illustration of the old saying that "
markets climb a wall of worries."
and Employment Lead to
Last week, second-quarter GDP came in higher than expected at
1.7%. Although the economy was stronger than expected, the pace
of growth remains slow. For the first half of the
, GDP grew by 1.4%. Federal Reserve statements indicate it
expects year-over-year growth to be 2.3% to 2.6% at the end of
2014, a target that is within reach given the results from the
first half of the year.
While GDP might meet
's expectations in 2013, this would be the eighth consecutive
year that GDP has been below its long-term average annual growth
rate of 3.3%.
Also last week, we learned that the
for July fell to 7.4%. This drop was once again because more
people left the workforce; the number of jobs created was below
Despite all the negative headlines, the S&P 500-stock
closed above 1,700 for the first time last week.
S&P 500 (
gained 1.1% last week.
SPDR Dow Jones Industrial Average (
also reached a new all-time high last week and
PowerShares QQQ (
traded at its highest level since November 2000.
Traders seem to be ignoring the headlines and buying stocks
despite the weak economy. They seem to believe that slow growth
is still growth and
should rise, at least slightly, as the economic expansion
continues. The expectation of higher earnings has pushed SPY to a
We can run a test to see what happened in the past after SPY
reached a new 52-week high. Looking specifically at where SPY was
six months later, the test includes the results from 23 times
when SPY set a new 52-week high since it began trading. There
have been many more new highs than that, but new highs often
cluster in time with several coming in rapid succession as we saw
last week when new highs were set on two consecutive days. This
test assumes you buy the first new high and hold SPY for six
months after that signal.
Six months after reaching a new high since 1993, SPY has been
higher 91.3% of the time and the average
has been 6.6%. These values are significantly above the average
gain of 2.8% in SPY seen in other six-month periods. On average,
SPY shows a gain 66% of the time for six-month holding periods.
Similar patterns of above-average returns are also seen in DIA
and QQQ after they make new 52-week highs.
Over shorter time periods, the results are less clear. There
is about a 50% chance of a pullback in the month following a new
52-week high in SPY, a piece of information that has little value
from a trading perspective.
There is also little information to be gained from testing
what happens after SPY gains more than 5% in a month like it did
in July. The performance after such a large gain is actually no
different than the typical performance. This holds true over
periods from one week to six months.
Based on the new highs in the major stock
averages, we should expect to see additional gains in the stock
market over the next six months. If there is a short-term
pullback, that should be viewed as a buying opportunity.
Gold Should Start Building A Base
pulled back and lost 1.88% last week. GLD also delivered a
larger-than-average gain in July, closing the month up 7.43%.
GLD does show a clear trend after making such a large gain. In
the past, we have seen a pullback over the next month and
weaker-than-average performance over the next six months. This
result is confirmed when testing with gold
, which have a much longer history and have been traded for more
than 30 years.
Silver Trust (
and almost all mining companies have chart patterns that look
similar to GLD.
This sector is extremely oversold. Bottoms usually form slowly
in commodities markets, which is one of the ways they behave
differently than stocks. In the stock market, we usually see
prices form a topping pattern over several weeks or months and
bottom on spike lows. In commodities markets, we generally see
the opposite with spike highs and extended
forming to mark bottoms.
Action to Take -->
Given this behavior, there is no need to rush into precious
metals. We should expect to see
(RS) turn up as the base forms, and until RS turns up, GLD, SLV
potential in the short
This article originally appeared on ProfitableTrading.com:
Market Outlook: Another New High in Stocks as
Economic Concerns Grow