What the May Highs Mean to Me

When we go through all of the charts in the US Stock market, there are sometimes certain reference points that we can look back to in order to find strength and weakness within the stock universe. I think the May high in the S&P500 is one of those price and time reference points that we can compare stocks and sectors to. Here’s the $SPY daily bar chart showing the highs in May that I’m referring to:

8-21-13 spy

Now, when looking for strength within the market, we would much rather be buying the stocks that were strong enough to exceed those previous highs. If a stock or sector was unable to surpass that May peak then, to us, it is a clear sign of weakness. We would prefer to stay away from those names, or even short them if the opportunity is right. And we would rather not be short the stronger names, of course.

Here are a few examples of sectors within the S&P500 that showed enough strength to get through the May highs: Financials, Discretionaries, Industrials and Healthcare:

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Technology and Materials were barely able to make it over:

8-21-13 xlk8-21-13 xlbAnd the weakness was definitely out of the Staples, Utilities, and Energy that all failed to make it back above the May highs:

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This is how I see things right now. Those May highs are a reference point that we are comparing stocks and sectors to. And as I mentioned above, I would much rather own the strength and be short the weakness. And this may sound like common sense, but sometimes “strength” is more difficult to define. In this case, I think it’s much simpler.

Trade ’em well….