This story was originally published here.
This week’s update will emphasize some of the reasons the market may be overextended right now, but it is not a suggestion that you become bearish or avoid any bullish options positions.
Rather, our objective is to be clear-eyed about the risks we face right now and why our strategy should remain focused on generating income as a way to profit and protect our gains even if the market declines again.
From a fundamental perspective, forward valuations haven’t been this high since 2002. This indicates that stock prices are a little “rich” and the trend is fragile.
All the job losses over the last few weeks have put the labor force participation rate at multi-decade lows. This is likely to add weight to resistance levels and should motivate us to avoid stocks in the home builder and basic materials sectors, among others.
And as we mentioned in last week’s update, the market is showing some signs of shifting sentiment. Nothing appears to be too problematic yet, but the potential for the S&P 500 to hit resistance at or around 2,930 is something we want to keep in mind.
On the bright side, Monday’s 3% rally was the biggest bullish day in six weeks. April 6 and April 8 were better, with gains of 7% and 3.4% respectively. But, interestingly, the same kind of news drove all three days’ gains.
In April, quickly falling death rates in some virus hotspots in Europe triggered the buying. On Monday, it was news that a new vaccine therapy may be ready more quickly than consumers expected…
Editor's Note: For the full story, click here.
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