Breakout

Don't fear the divergence, but be prepared anyway: Hoenig

Breakout

One day after making all-time highs in glorious tandem, stocks slumped on Wednesday, dragged down by profit taking and yet another round of selling in the Russell 2000 (^RUT). The small cap index remains down for the year while the broader S&P500 (^GSPC) continues to cling to gains; a divergence that has many market watchers concerned heading into summer.

Jonathan Hoenig of Capitalist Pig isn’t concerned. “The bull market is intact,” he insists. While conceding that leadership has definitely shifted from the high-fliers Hoenig says that’s to be expected. The important thing is that the overall market is rotating in a healthy way and stocks are higher. The fact that it doesn’t feel better is more a function of investors having gotten spoiled than a problem with the tape itself.

Related: What's next for the market...technically speaking

“That doesn’t mean we’re not due for a correction but you won’t want to fight the tape and at least as I stand now the tape points upward.”

There’s been a more or less uninterupted bull market for the last five years. That’s not only unusual but it suggests an unsustainable complacency that seldom ends well if it goes unchecked for too long. A pause that refreshes could bring in just the sort of worry stock markets need to generate additional gains.

Hoenig has some sound advice for nervous investors. “This is a good opportunity not to sell (winners) outright but to use staggered stop-loss orders below the market price. So if the markets do correct significantly you can get out with some of your profits but if the market continues you can continue to exploit those gains as well.”

Such strategies require a lot more discipline than the “buy every dip” theme in place since 2009, but in a market that’s starting to show it’s age putting in some stops can help control your emotions for what could be a bumpy, albeit perfectly normal, period of consolidation.

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