It's easy to get locked into the day-to-day movement of stocks...
Each day seems like a significant development for the markets. But that's not necessarily true...
On a shorter time frame, there's a lot of "noise." Some market moves have meaning, while others don't mean much at all.
That's why it's a good idea to take a step back and look at the big picture from time to time. One of the best ways to do this is to consider the trends in major market indexes.
That's what we'll do today with U.S. stocks. And as you'll see, the big picture is bullish...
Trends are the most important idea in technical analysis. When an asset establishes a trend – either rising or falling – it tends to keep moving in the same direction. Understanding and monitoring trends can dramatically improve your results in the markets.
We typically gauge trends with moving averages...
Two of the most common moving averages are the 200-day moving average (200-DMA) and the 50-day moving average (50-DMA)...
The 200-DMA is simply the average of an asset's closing prices for the prior 200 trading days (about 10 months). We use it to gauge the long-term trend. The 50-DMA is the same thing for the prior 50 days of price action. We use it to gauge the intermediate-term trend.
For longer-term positions you expect to hold for a few months to several years, you should pay more attention to the 200-DMA. For shorter-term trades you expect to hold for a few weeks to a few months, you should pay more attention to the 50-DMA.
We consider two main things when looking at moving averages...
The first is that during bull markets, assets tend to spend most of their time above their moving averages. And during bear markets, they spend most of their time below them.
The second is the direction of the moving averages themselves. The moving averages are the trends. When they are moving higher or lower, assets often continue to move in the same direction.
These widely followed moving averages often serve as important "support" and "resistance." Support is a level at which folks tend to buy an asset and prices often stop falling. It's an obstacle for falling prices. Resistance is a level at which folks tend to sell and prices often stop rising. It's an obstacle for rising prices.
Either way, if an asset breaks through support or resistance, it will often continue to move in that same direction.
Now here's what we're seeing with U.S. stocks...
The Russell 3000 Index essentially tracks the entire U.S. stock market. It consists of about 3,000 of the largest U.S. companies, which make up around 98% of the country's total market value.
The Russell 3000 is market-cap weighted (like the large-cap benchmark S&P 500 Index)... So the biggest companies make up a far larger percentage of the index than the smaller companies. To give you an idea, the top 12 companies account for 25% of the Russell 3000.
Still, the Russell 3000 is one of the best ways to gauge what's happening across the U.S. markets.
As you can see in the chart below, U.S. stocks are in a big uptrend. The Russell 3000 fell below its 200-DMA in February 2020 and dropped quickly. But almost as quickly as it fell, it snapped back above its moving averages and started to climb.
By July 2020, the Russell had risen above its 50- and 200-DMAs. And its 50-DMA had crossed above its 200-DMA. Since then, the index has mostly held above both its key moving averages...
This is very bullish price action. U.S. stocks are trending higher. And they've hardly dipped below their rising 50-DMA. So both the short-term and long-term trends are up.
We're a little concerned about the extreme bullish sentiment toward U.S. stocks we've seen lately. And stocks could pull back in the short term... But we're not bearish. We would view a pullback as a good opportunity to add new bullish positions.
Good trading,
Ben Morris and Drew McConnell
Editor's note: If Steve's latest predictions prove true, this year could bring a destructive Melt Down in stocks. But he believes something else is coming before the ultimate bull market peak... a tectonic shift that's ramping up right now. Tomorrow at 8 p.m. Eastern time, he'll reveal how to prepare, and even profit... Save your spot right here.
Further Reading
"Fund managers were giving up on growth stocks back in March," Chris Igou writes. But that proved to be the wrong move. Growth stocks are up more than twice as much as value since then. And best of all, there's much more momentum ahead... Read more here: The Growth Stock Rebound Is Just Getting Started.
When too many investors pile up on one side of a trade, it's normally a good idea to take the opposite side of the bet. But a survey of hedge-fund managers says today's bullishness means we want to own stocks now... Get the full story here: Fund Managers Hit Near-Record Levels of Bullishness.
We want to make sure that we get every last bit out of this Melt Up and lock in all the gains available to us. And there's no better way to do this than by having the trend on our side...
THE HOME-IMPROVEMENT TREND IS HELPING THIS LANDSCAPE-SUPPLY GIANT SOAR
Today's chart highlights a company that's performing well as folks remain stuck at home...
Pandemic-related shutdowns forced many people to stay at home last year... giving folks plenty of time to spruce up their living spaces. Companies like Home Depot (HD) and Lowe's (LOW) have thrived thanks to this massive boost in home-improvement projects. And today's company is benefiting, too...
SiteOne Landscape Supply (SITE) is the leading provider of landscape supplies in the U.S. It offers a wide variety of products such as fertilizer, trees, outdoor lighting, and irrigation supplies. The company got a boost during the pandemic as more people decided to make "home" a great place to be... both inside and out. SiteOne made $2.7 billion in net sales in 2020, up 15% year over year.
SITE recently surged to fresh all-time highs. Plus, it's continuing a long-term uptrend. Our colleague Bryan Beach recommended SITE to his Stansberry Venture Value subscribers back in March 2017... And those who followed his advice are up more than 200% so far. Congrats to Bryan and his team!
