Since 2009, the U.S. stock market has become one of the hottest plays. Investors have poured in money and have reaped the rewards. In the last five years, many stocks have doubled or more. Looking at all this, one must really question if the stock market can go at this pace for a long period of time.
If you look back, you will notice that whenever there has been too much bullish sentiment, the stock market usually comes down. As it stands, we see stock advisors calling for 2014 to be a year similar to 2013 when the stock market increased significantly.
I don’t agree with the mainstream opinion. I have said this before in these pages: the stock market will most likely not show as robust a performance this year as it did last year—and it may even fall as we head further into the year.
For the stock market to continue to increase, you want to see momentum on the side of the buyers. When I look at the charts, I see nothing but indecision and exhaustion. It appears investors are struggling to take the prices higher. Look at the chart below. I will use the sell-off we saw in January and early February as an example.
Chart courtesy of www.StockCharts.com
One of the indicators of a healthy stock market that I look at is how many days it takes to get back to or break above the market’s previous highs after a sell-off. If the market moves slowly, then you can judge it as not as strong. If it goes back up quickly, then the opposite is true—the market is strong.
Going back to the chart above, between January 23 and February 3, the stock market (represented by the S&P 500) declined by more than five percent. This decline occurred in seven trading days.
To recover from the decline, the stock market took 13 days, and it didn’t really make a clear high until the 19th day. Simple math will tell you it took almost twice as many days to recover from the decline and almost three times as many days to form a clear high.
What all of this essentially means is that the excitement factor isn’t there. In a healthy market, you want to see strong buying come in after pullbacks. In 2012 and 2013, we saw this; going into the New Year, that wasn’t the case anymore, which is where we stand at now.
In markets like these, investors have to be careful about what they are doing; it’s just going to take longer for an investor’s portfolio to recover if they get stuck when stock markets are in pullback mode. In these times, for those with a little more experience, stock picking can help grow your portfolio rather than buying the broader market through exchange-traded funds (ETFs).
This article How to Boost Your Profits in This Exhausted Market by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter.