Over the last several weeks, in both the daily blog and weekly newsletter, I have been laying out the technical case for a breakout above the downtrend. As I stated, while such a breakout would demand a subsequent increase in equity risk in portfolios, I didn’t like it. To wit:
“First, let’s remember that the current advance is not built on improving economic or fundamental data. It is built simply on ‘hope.’
With valuations expensive, markets overbought, volatility low, and sentiment pushing back into more extreme territory, there are a lot of things that can go wrong.
As shown in the following chart, the recent surge in asset prices has also turned the 50-dma sharply higher and is in the position of crossing back above the 200-dma. It is worth noting that the last time this occurred, it did fail shortly thereafter.“