This weekend a private high school in Miami staged its prom, and the theme was “Welcome to the jungle.” No story there, right?

But there was, as the school administration, seeking to make it an event, invited not only the students but what looked like a portion of the Miami zoo. Most prominent among the animals attending was a full-grown, caged tiger.

I, along with most commenters, was appalled at the thought of a tiger being tormented with hip-hop music and teen dancing. PETA (People for the Ethical Treatment of Animals) quite appropriately protested and criticized the obvious cruelty to animals.

Incredibly unmentioned was the threat to the students from having a potential man-eater at the prom. What if it had broken out?

“Breaking out”—the phrase is one that has many connotations in our lexicon. Certainly, in this instance, it can only be negative, like convicts or a rash breaking out—and don’t forget acne!

At the same time, “breaking out” can also be quite positive. For example, we all celebrate when our troops break out of a trap, and we don’t hesitate to call a great song a breakout hit.

Most apropos of today’s column is the definition given in the Urban Dictionary, which defines “breaking out” as “getting out of a rut.” Because that’s exactly what the S&P 500 Index finally did last week—it broke out.

Since the stock market index hit a new all-time high on January 26, it has charted out a declining triangle that seemed to have captured investors in a diabolical trap. Prices would not collapse below its floor, and investors could not escape through its downward-sloping ceiling.

S&P 500 Last 12 Months

That all ended last week as stocks punctured the ceiling. Of course, that was the preferred direction when the inevitable breakout occurred. Normally, an upward breakout will lead to a new assault on the old high watermark.

It is true that we still need to watch out for a false breakout. This will be the case if the market quickly reverses and descends below the ceiling once again. That would be a very bad sign.

Speaking of a new all-time high, right after stocks plunged in January I wrote that I thought that stocks would return to all-time highs by mid-May. I must have broken out with something to be predicting anything, especially after saying in December that I expected a 10% to 15% correction.

Now here we are in mid-May. After an 11% correction in the S&P 500, that Index is still 5% below its January 26 high. Still, I do feel at least partially vindicated by the fact that the broadest measure of the stock market—the cumulative advance-decline line (a line created by adding the total number of the market’s advancing issues to its declining members)—did, in fact, hit a new all-time high last week. And all of the domestic stock market indexes are now in positive territory for 2018!

S&P 500 vs A/D line

The market regimes (see our Market Environment Indicators here) continue to favor stock investing over both bonds (which are down for the year) and gold (which is slightly positive). Our short-term indicators continue to be positive, as is also the case for our intermediate-term strategies. Last year’s number one equity strategy, Self-adjusting Trend Following, moved back to a fully leveraged position last week.

Most news for the period was good news. Despite the trade-war threat, I note both China and our own stock indexes gained more than 3% last week!

Earnings reporting season for the first-quarter reports are just wrapping up. Both earnings and revenues have beaten expectations at a rate rarely seen in the last decade (if you don’t count last quarter, when the same lofty levels were attained by both).

Just as earnings analysts were found to have lowballed earnings, economists missed on the low side on last week’s economic reports. Ten of 14 reports were better than expected.

An unexpected positive found in the economic reports was the consistent miss by the experts on inflation. Most inflation measures found that inflation was lower than expected, in both the inflation reports themselves and the component prices-paid measures of both the ISM manufacturing and services surveys.

ISM Services & Manufacturing Net Commodities

This positive inflation news caused the upward trajectory of interest rates to pause. The 10-year bond yield has halted its relentless move higher this year and spent the week back under 3%. This, too, is encouraging for stocks.

Back in 1988, a favorite blues guitarist of mine, Buddy Guy, released a tune called “Breaking Out On Top.” Let’s hope that’s the next news we hear on the S&P 500. That would definitely qualify as a positive use of the phrase. And I hope the only breaking out we hear about at a prom concerns someone breaking out into the latest dance.

All the best,

Jerry

Jerry C. Wagner is Founder and President of Flexible Plan Investments, Ltd. Formerly a tax and securities attorney, Mr. Wagner recognized early on that technology and hedge fund techniques could be applied to help individuals successfully invest, while managing their downside risk. After spending time pioneering new techniques in market analysis, designing quantitative methodologies, and managing investment portfolios, Mr. Wagner founded Flexible Plan Investments in February 1981.

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