The S&P 500 is about to deliver itself into a resistance nightmare with a move over 3,000. While investors celebrate this neat round number in the days ahead, with new record highs for the S&P, they should also be aware that the attention magnet neat round numbers attract around new highs doesn't necessarily go well with brick walls of historical resistance.
Let's be clear here: Resistance and growing optimism in the face of round numbers and record highs does not equate to auto-bear mode. It simply means that investors shouldn't fall into the trap of automatically hitting the max allocation button if they have been underinvested recently.
There are a lot of investors who missed this rally and are looking for a decent spot to get involved. What happens when S&P 3000 hits, CNBC has a scrolling "NEW RECORD HIGHS" with an animation of a bull riding a flag draped rocket to Jupiter and Mr. Underallocated Investor sees his neighbor is building a 3,000 square foot, mahogany laced dog house as an addition to his home?
Panic buying.
The buy button is about to be hit across Wall Street, which may continue this surge a bit longer. However, the fear of missing out on a trade is rarely the one you want to get involved in as an investor. Especially when its occurring around resistance that will create excessive volatility and a terrifically terrible risk/reward trade overall.
All of those investors who missed out on allocating to equities when they should of are about to be hit with a massive dose of "I can't take the FOMO any longer."
So here's what to do in each circumstance:
If underallocated - Be selective in getting involved here. Financials are a good choice to start. They have room. Stay away from high momentum growth or anything else that has the potential to keep you up at night when the volatility equation gets turned on its head. You have the next couple months to allocate in the right spots before the market really gets moving past resistance.
If overallocated/leveraged - Take profits selectively. As discussed, no reason to go into auto-bear mode. No reason to add here either. You've done well. Don't ruin it by becoming a pig.
If evenly-allocated (defined as 75% or so exposure to equities) - You have to move to 100% exposure in the next couple of months. The 25% with a negative real yield has a very real opportunity cost. Mix up the allocation with tech and financials. Do it slowly through July and August in an opportunistic, deliberate manner.
Have a happy 4th.
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