Since 2009, stock markets have experienced some of the best rallies in the history of the financial markets. This should not have been altogether surprising, given the fact that these rallies came after some of the most substantial declines in the history of the financial markets. So the real question that long-term investors should be asking is whether or not these gains can continue, and whether there is sufficient bullish momentum in the market to send prices to new records.
But when we look at the fundamental outlook, there is less reason to be optimistic. Recent commentary from the Federal Reserve suggests that interest rates will likely be increased before the end of this year, and this will almost certainly drag on the ability most companies exhibit in posting quarterly earnings results. When we combine this with the fact that overall momentum in the markets has been lackluster this year, it suggests that short positions in the S&P 500 are likely to generate better results when compared to the bullish alternatives.
In the chart below, we can see that price momentum is waning significantly even though summer trading volumes have not fallen below their averages. This could make it difficult for market bulls to gain much traction unless we some significant surprises from the Fed. But since this is largely unlikely, it makes much more sense to start selling into rallies as they become apparent. The first level to watch is currently found at 2125, and any short-term trending moves that occur near here will likely be met with selling pressure.
So when we take the S&P 500 from both the technical and fundamental perspective, there is little reason to believe that the index will close the year near its highs. This does not necessarily mean that profitable trades will need to be outright short trades in order to succeed. There are other strategies (such as put options) that would also benefit from the current environment given the fact that there is far greater downside potential than there is upside risk.
This is something that has not been highlighted for the most part in the financial news media, so any negative surprises at this stage would generate significant downside if most of the market sees close stop losses tripped. For all of these reasons, savvy market investors should be looking for ways to play against the positive longer-term momentum in indices like the S&P 500.
