Even in a holiday-shortened week, with little in the way of data, the path of least resistance remains upwards for US equities. The economic backdrop is generally favourable. The US economy is growing at a faster rate than expected, unemployment remains low and the understanding is that interest rates have peaked, even if the timing of future rate cuts remains uncertain, due to the recent uptick in inflation. Against this all is the belief that US stocks are overbought. Certainly, the major indices have rallied a long way in a very short space of time. But this fact is in itself why many believe that there’s still room to the upside. Quite simply, there are still many investors who have felt unable to take on enough long-side exposure to benefit from the rally which began in late October. The relentless nature of the rally, given the absolute lack of any significant pullback since its start, have left many would-be investors stranded and frustrated. There’s been very little selling pressure which has meant that buyers are having to pay up. And as more investors close their eyes, hold their noses and dive in, prices should continue to melt up. This will go on for as long as it will, until we hit the inevitable barrier, which no one can currently see. Once that it hit, there will be an unseemly rush for the exits.

For now, with the S&P holding over 5,200, there’s no indication that we are about to see a significant pullback. But as the daily chart shows, prices have broken above the upper channel line of resistance which suggests we’re experiencing the kind of melt-up that often signals that a rally is coming to an end. This could be a time to be cautious, especially as the MACD is flattening out a touch.
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