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Boy Scout 101
A fire needs three elements to sustain itself.
Known to the Boy Scouts out there as the “fire triangle.”
Heat, fuel, and oxygen.
The stock market isn’t much different.
Heat – That’s trend.
And the S&P 500?
It’s in a long-term uptrend, sitting comfortably above a rising 200-day moving average and coming off back-to-back 20% up years. Safe to say, it’s plenty hot.
Fuel – Fire needs something to burn.
In the market, I think of breadth as fuel. Stocks (wood) that can sustain the next leg higher.
Oxygen – Meh, idk but I like where this analogy is going.
STAY WITH ME.
Plenty of Fuel
Earlier this year, I was cautious when the market hit a new all-time high (ATH).
Sounds crazy right?! But the fuel tank looked empty.
S&P 500 Last Time
Take a look at the percentage of stocks above their 20-day moving average.
A short-term but imperfect indicator (and if you ever find a perfect one, send it my way).
It’s useful for quickly assessing short-term trend strength.
Stocks above the 20-day? Stronger trend.
Stocks below? Weaker trend. Duh.
One way to use this is by watching for extremes. Or, if you want to sound fancy, the oscillations (since, as we know, it can’t go above 100 or below 0).
When it gets too high, all the fuel is already on the fire and there’s not much left to burn.
But when it’s low within a strong long-term uptrend, that’s an opportunity.
The fire is already hot, and now there’s a fresh pile of wood ready to keep it going.
S&P 500 This Time
That’s what I like about this setup, we have plenty of wood stacked, ready to burn.
This is what I’d call a “sweet spot” where investors should like adding capital.
A long-term uptrend with plenty of fuel on the sidelines to drive new highs.
Admittedly, we haven’t seen them yet, and no one truly knows the future… but that’s where I believe we’re headed.
This Time Was Different
This time was different.
When the market approached new all-time highs earlier this year, it looked like we were out of fuel.
Now?
We’re approaching new highs with plenty of fuel to burn even higher.
Giddy up!
Weekly Show on Stocktwits
Check out my weekly show with my friends at Stocktwits!
In the first 20 minutes, I break down market conditions and study some of the great stocks of this bull market and how we can search for the next one.
Put it on 1.5x speed and let it rip.
Appreciate The Love
Can I be sappy for a second?
I genuinely appreciate all the love and support I get here.
People subscribing and sharing my work keeps opening doors—helping me improve what I do and bring even more value to those who support me.
Keep an eye out for my new research column, “Thompson’s Two Cents.”
I’ll be dropping my quick take on the current market environment.
The Best is yet to come!
Cheers,
Larry Thompson, CMT CPA