What comes next after the worst year in the Stock Market since 2008?
Investors should be aware that we are currently in the latter stages of the longest running bull market on record since the 1940s. The S&P 500 closed right under 800 at the end of March 2009 and is currently trading in the 2700 range nearly ten years later – resulting in a gain of over 330%. We experienced the most significant monthly correction last month (December 2018) that we’ve seen in 10 years, with the S&P 500 falling 11%. The bearish close to the year ended up making 2018 the worst year for stocks since 2008. We also made history in 2018 by having the worst performance ever seen in the U.S. markets on Christmas Eve, only to be followed up by the best day ever seen in the markets on the day after Christmas. So how does the average person translate all this market data? Well, it’s safe to say volatility is back and investors should trade accordingly. As of 1/28/2019, the S&P 500 is up 7% for the first month of the new year, with the S&P 500 opening January at 2476 and has a current trading level right around 2640. We’re still down about 150 points on the S&P 500 from the start of December 2018, where we started the month at 2790.
The question everyone should be asking is how much longer do we have until the current economic cycle ends and our long-term uptrend starts to turn over? That’s a challenging game to play; however, 2019: Q1 earnings should help provide some insight into U.S. corporate growth for the foreseeable future. Generally speaking, company profits are healthy and relatively higher in the expansion phase compared to other economic cycles as businesses tend to heat up in this stage. The opposite is also true; having lower corporate profit margins when coming out of recession due to the contraction and slowdowns experienced during recessionary times. With the Federal Reserve raising interest to the 2.5% level at the most recent Fed meeting, perhaps the most significant catalyst to help continue this bull market seems to be easing trade tensions and making a deal with China. I am a firm believer of technical analysis acting as a useful tool to help uncover market sentiment, investor psychology, and help offer insight into trend continuations or trend reversals. In my opinion, utilizing technical analysis alongside a sound fundamental approach helps reinforce your ideas into actionable strategies. One of the technical tools I use to uncover changes in economic cycles is cycle brackets. Cycle brackets break a given chart timeline into periods of equal length in the attempt to help reveal market cycles. The periods are marked as red arcs and can be seen below in red semi-circular marks:
It’s essential you understand there are limitations to using any technical analysis tool, system or method. Technical analysis is not always accurate and can be difficult to interpret for some investors. It may be confusing on how to utilize cycle brackets for the average person since you have to decide how you will extrapolate them by selecting specific areas on a chart. The way in which I arrived at the cycle bracket readings above was by pulling up a 25-year weekly chart on the $SPX (S&P 500 index), and selecting the February 2003 low which was the start of the 2003-2007 uptrend, and then connecting that data point to the March 2008 low which was the start of the current bull market we’re presently in. It’s important to note that in 2014-2015, we did not see a significant market sell-off like in the two previous cycles: 2007-2008 and 2001-2002. This is an excellent example of showing how one must interpret this information subjectively, often with other fundamental or technical sources to confirm or deny the legitimacy of the signal. Furthermore, investors should note that not all market cycles are created equally, and the preceding analysis does not necessarily indicate an accurate projection into the current or future timeframe.
As pointed out with the orange line, the S&P 500 is currently around 2700. It is possible that we still have another year or two left of this current cycle; however, we have passed the midpoint of the current bracket we’re in, which could be translated into a potential slowdown in the next several quarters ahead. Ideally, you want to authenticate this standalone signal with other indicators, such as an underlying security making consecutively lower highs and lower lows, bearish sentiment on momentum and trending indicators, increasing volume on sell-offs, disappointing and declining earnings reports from top companies and weakening micro and macroeconomic data amongst many other factors.
Based on the current consensus, we see modest viability to continue this ten-year bull market into 2019; however, we remain cautious moving into the quarters ahead and will be monitoring any change in economic indicators since we are currently in the later stages of our economic cycle. The current price levels we are watching are 2700 which is the most prominent resistance level and then 2940 which is our all-time high on the S&P 500 that was reached back in September 2018.
If 2019: Q1 earnings are positive enough and we have the supporting volume to break above 2700, then it is very possible that we can retest the all-time high of 2940 on the S&P 500, and potentially make new highs before the end of our current economic cycle. If our current economic and political events bring in bearish sentiment, and earnings are not strong enough to act as our primary catalyst to push prices higher, then it is likely we will make a consecutively lower high on the S&P 500 which would act as a bearish indicator and could be the start of a bear market in the months and years ahead.
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