A correction in the U.S. stock market is now overdue. But what actions should investors take if any in anticipation of such a pullback? For the long-term investor, the answer is very little, at least at first, as they will likely be better served to initially stand their ground with positions if not snap up a position or two on any short-term pullback. This is due to the fact that stocks enjoy an extensive netting of technical support at current levels. Stocks have repeatedly bounced off of key technical levels such as the upward sloping 20-day, 50-day, 100-day and 150-day moving averages throughout the latest market rally that began at the start of 2013. And until the S&P 500 Index begins to sustainably break these important technical levels and begins to test the still upward sloping 200-day moving average over the period of a few months, stocks are likely to maintain their short-term resilience. Moreover, bullishness among stock investors remains sufficiently strong at this point that even if we were to see a sustained correction, buyers would likely emerge to purchase the dips and reverse the downward trend at least on the first or second correction. Such is the nature of market topping processes and how bull markets end, and it will be key to monitor how the market behaves once some of these key technical levels are breached to determine whether a bull market top has finally been established or if the uptrend is poised to continue further.
Despite all this negativity, equities have continued grinding higher this year. Why? It is the fundamentals that matter for markets, not sentiment, and U.S. fundamental economic data have been strong, and are getting stronger.
How strong will the rally be? The tectonic sentiment shift from negative back to positive that is now starting, and the likely spread of economic strength from employment to incomes, make me think that it will be quite strong - our latest forecast for the S&P 500 six-month return is between 5% and 10%.
In the period following recessions, the black line tends to be above the red line, which means GDP growth accelerates (drops on chart) relatively faster than jobless claims fall. This was true following the recessions beginning in 1990, 2001 and 2007.
However, investors need to be aware that while consumers will indeed have to continue to eat, drink and take their medicine, and therefore continue to buy the products of those companies, in a market decline investors do not have to continue to value the earnings of those companies as highly as during an exciting bull market. Furthermore, they do not.
A fair amount of attention has been paid in the past couple of weeks to the low market volatility that has evolve in certain markets.
But, these three situations…and more…I believe contribute to a feeling on the part of investors that they really don't know which way the economy is going to go and they are trying to stay sharp so that they can move in the appropriate direction when the time is right.
As we concluded here last week, there was no compelling evidence that the selloff was anything more than a normal temporary pullback. The past week's bounce in most global indexes suggests that most felt likewise.
At this point, the market needs more than just hopes.
As we move into April, it's important to look at the stock market's long history of making most of its gains each year in a favorable 'season' of November to April, while most of its corrections and bear market down-legs take place in an unfavorable season from May to October.
Additionally, the historical evidence that clearly shows seasonal investing substantially outperforms the market over the long term (while taking only 50% of market risk) includes those individual years when it did not outperform.
The big question for this year is whether it will be three straight years that seasonality does not 'work'. Or will it more likely resemble 2011 (or worse), when massive QE stimulus did not prevent a 20% market plunge in the unfavorable season. (The only thing that prevented it from becoming worse in 2011 was that the Bernanke Fed rushed in to double the QE from $40 billion a month to $85 billion a month).
No key support levels for the U.S. market have been broken, even short-term, and we remain in the market's favorable season.
But it was the anecdotes about what investors were doing that were most disturbing.
The people featured in the article are making all the mistakes in the book: jumping in to the market again after a huge, multiyear run; buying individual stocks, a loser’s game for the vast majority of investors, and, worst of all, trading.