Hold Your Nose And Buy

No need to beat around the bush.

I’m buying stocks - right here, right now.

Last week, in It’s Time, I laid out the case that breadth expansion was the next phase of this bull market.

That’s exactly what started to play out this week.

As the indexes masked the breadth expansion because the one extended corner of the market finally took a breather.

This is that counterintuitive part of a bull market where things still feel a little “stinky.”

There’s hesitation. There’s doubt. But that’s when opportunity tends to show up first.

Here are three reasons I’m adding exposure now:

Short-term, things have been messy. But zoom out.

The long-term trend always takes precedence over the short-term noise.

SPY remains well above its upward-sloping 200-day and is currently hammering out a potential low against a rising 50-day moving average.

In an uptrend, the best risk/reward opportunities come when you’re buying at the lower end of the range, not chasing strength at the top.

Right now, that’s exactly where we’re sitting.

The chart below shows the S&P 500 % of stocks above their 20-day moving average.

Each time we’ve tagged these “washout” zones near 30%, breadth has dug in and renewed its strength.

But it’s not simply breadth at washout levels that’s bullish, it’s the reversion from those levels that tells the story.

When participation starts turning up from an oversold condition, that’s the signal.

In other words, this isn’t about catching a falling knife; it’s about recognizing when selling pressure has exhausted itself and started to improve.

This Short-term breadth expansion carried through across nearly every sector, from cyclicals to defensives.

The S&P sector breadth table below shows broad-based improvement on the shorter-term trend measures.

The kind of shift you typically see early in renewed advances.

Markets are a probabilistic game, not a certainty business.

I don’t have high conviction….yet.

We still need follow-through from this weeks hammer candle, but I love the hand that’s been dealt.

The risk/reward is clearly defined: using today’s low as the stop gives a small loss if wrong, and meaningful upside if right.

That’s how you win in trading, taking asymmetric bets when the setup is favorable and your downside is controlled.

Markets reward discipline over perfection.

You’ll never catch the exact bottom, and that’s not the goal.

The goal is to position yourself when the odds swing back in your favor, even if it still feels uncomfortable.

Every bull market has moments like this where conviction feels low, but opportunity runs high.

That’s usually when the real move starts.

Anyways, that’s my two cents. 

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Cheers,

Larry Thompson, CMT CPA

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