We’re Not Out Of The Woods But The Market Is Bottoming
The pandemic-inspired sell-off was scary and there are reasons to fear it isn’t over. The coronavirus pandemic is still with us, it is unclear how long it will last, and we don’t know what kind of long-term damage has been done to the economy. That said, there are also reasons to think the broad-market (SPY) correction is over and one mother of a buy signal is forming.
For one, the sell-off was a knee-jerk preemptive move based on the worst-case scenario and that scenario, total economic collapse, is far from reality. The latest news is China is getting back to normal and there are signs of peaking in Europe. Both Italy and Spain report slowing infection and death counts while Germany has begun talking about a path to reopening the economy. From this perspective, the market sell-off was overblown.
For another, economists and Wall Street sell-side analysts are expecting a vigorous recovery starting as early as the late-second quarter. EPS and GDP growth will be bad this year but that will change next. The consensus estimate for S&P 500 earnings growth in 2021 is in the mid-teens and rising. Considering the amount of stimulus we’re getting, both fiscal and monetary, and we could see those estimates continue rising for some time. From this perspective, the market is very cheap and an attractive buy.
The Trend You Need To Follow Is Still Bullish
When it comes to buying stocks, the most useful tool is to follow the trend. The trend is your friend as they say and it pays to trade with your friend. What they don’t tell you, is which trend to follow? There are multiple trends in play, often at the same time and usually in conflict with each other, and that can make trend-following strategies difficult to use.
The trend I want to focus on today is the secular trend. The secular trend is the strongest trend you can follow because it encompasses the market at the population level and literally includes everybody. We’ve been in a secular uptrend since 2009 and that trend is not over. In fact, with the 35% correction we just experienced, the market is set up to fire a trend-following signal of secular proportions.
What is a trend-following signal? - A trend-following signal is a market timer’s signal to enter the market. The signal will be in line with the prevailing trend, ie a bullish entry in bull markets and bearish entry in bear markets, and usually consists of multiple smaller signals. In this case, a bullish trend-following entry, we’ve got prices bouncing from support, confirming a major trend line, and indicated higher.
The Stars Are Coming Into Alignment
To see the trend I am talking about the monthly charts are the best. On this chart you can see the S&P 500 in a clear uptrend from 2009 to 2018 when it entered a secular consolidation. Consolidation continues for the next two years until a peak is hit in early 2020 and the coronavirus sparks the correction. The correction shaved more than 35% off the broad market but did not break the uptrend. Support at the bottom of the secular range and the secular uptrend line is holding and support looks strong.
The only negative on the monthly chart is the indicators are still strongly bearish but there is a silver lining to that cloud. The weekly charts are consistent with a bearish peak and bullish shift in momentum that is confirmed by price action and the lower time-frame charts. The candles show strong support at the secular uptrend line and suggest upward price drift will continue in the near-term.
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