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The flu virus sure is nasty this year. Many of us have friends, co-workers, family members, or acquaintances who have been laid up in recent days and weeks.
But even as it seemed like everyone was getting sick, the stock market most assuredly was NOT. It just kept charging higher, influenza or anything else be darned!
Until the past few days, that is. The Dow plunged several hundred points at its worst levels in the last 48 hours, while volatility spiked to its highest level in five months. So, does that mean the market is sick? About to be felled by some kind of financial flu? Here’s my take ...
We’ve seen a rather euphoric, parabolic increase in stocks over the past several months. It has made even the naysayers and doom predictors come about and join the bullish camp.
That kind of extreme sentiment has historically fueled drawdowns, even when the underlying economy is in great shape (like today). Just take a look at this chart. This could be mistaken for a chart of a high-flying cryptocurrency, but in fact, it’s the S&P 500 large-cap index ...
Stated another way: Fundamentals are one thing, and investors do place a strong emphasis on those. The problem is that on a day-to-day basis, the market also has to digest and factor in things like excessively bullish sentiment.
Just consider that the AAII Investor Sentiment Survey shows 45.5% of investors are bullish right now. That’s well above the historical average of 38.5%, even after a dip of 8.7 percentage points from the previous week!
Still, we’re talking shorter-term stuff here. It’s the longer-term outlook that matters most to investors rather than traders. And I think it still looks solid.
For one thing, GDP is on track to grow 4.2% or more in the next quarter. For another, 80% of the companies that have already reported earnings beat expectations on both the top and bottom lines. That’s excellent news – and it’s not even pricing in tax reform, which should boost profits further in the remainder of 2018 and beyond.
Even interest rates, which some see as problematic to stock returns, are only around 2.7% (for the 10-Year Treasury). That’s still low, well below the range of 3.5% to 5% that would make bonds attractive enough as an alternative to stocks to prompt market outflows. Heck, rates got as high as 5.5% back before the Great Recession!
So, I wouldn’t worry that this market is coming down with a case of the Superflu. It looks more like a garden-variety cold to me. That means it’s worth looking at the technical backdrop to see which levels might prove attractive places to get in again ...
Source: BloombergYou can see that we broke the uptrend channel with yesterday’s action, but that we’re also holding above key Fibonacci retracement levels. On the other hand, moving average support levels are further below here because the recent gains left stocks extended.
Personally, I would look to see if the S&P can hold around the 2,825 level. If not, the next key level is 2,800. That could prove to be a solid entry point.
Remember: Pullbacks don’t have to signal a problem with the underlying economy or a threat of recession. They’re actually healthy occurrences, because they help to shake off bubble fears and get rid of panicky “hot money” investors – two things that lay the groundwork for a stronger next leg up.
Best wishes,
Mandeep
