Technical indicators flash red. Why you shouldn’t worry.
Stock market veterans love to say “the trend is your friend, until it ends.” And some investors fear it will happen soon, even with Wall Street at record highs.
A shift has taken place beneath the surface of the stock market in recent months, which means historic highs in stocks could be under threat, analysts said.
Wall Street watchers highlight this concern: Fewer stocks are part of the market rally, which is often seen as a warning sign for investors.
What does it look like? Take, for example, that the percentage of NYSE common stocks trading above their 30-day moving averages fell to 45% on July 2, from 83% on May 7, according to Lowry Research, a service from Technical advice.
That would suggest fluctuations for stocks in the coming months, analysts said.
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So does this mean trouble for your nest egg?
Not necessarily. So don’t panic just yet.
On the contrary, the stock market has remained resilient despite concerns about the economic effects of the spread of the Delta coronavirus variant and concerns about the Federal Reserve’s reaction to rising inflation, analysts said.
So far, the S&P 500 has recovered 90% from the depths of its pandemic lows. Any weakness could present an opportunity to pick up more stocks at lower prices, or you could at least maintain your retirement accounts, fund managers say.
Even if the trend is no longer your friend, don’t become your own worst enemy by letting emotion rule your investments.
I remember when stocks fell sharply in October 2018 over concerns about the state of global expansion. Trading was choppy in the following months, then stocks plunged in December, pushing the S&P 500 to the brink of a bearish market with an almost 20% drop from its peak.
Some investors panicked, but the markets quickly recovered over the following weeks and made a dramatic turnaround after the sell-off. An analyst I spoke with at the time said the correction had accumulated for months, but was ultimately short-lived. When their emotions were running high, I had friends who withdrew some stocks they owned. But they soon regretted it once stocks recovered.
There may be bumps along the way, but stay seated
Now is the time that a cool head will help you think counterintuitively.
“You want to be the greediest and the most eager to buy stocks when prices are down rather than when prices are up,” says Sam Stovall, chief investment strategist at investment research firm CFRA. “You’d better buy than bail out. “
For long-term retirement savers, history suggests it’s best to stay stable, Stovall added.
That’s true for Courtney John, 33, director of community recreation for the city of Saint Paul, Minn.
She and her husband Spencer, a chiropractor, aren’t worried about the twists the market might bring this year. They invest for the long term, and they’ve poured their stimulus checks into their Roth IRAs over the past year. They both have an employer-sponsored pension plan to which they also contribute.
Although they are reducing student loan debt, they both received a stay on federal student loan payments during the pandemic and were able to get a low mortgage rate last fall for their dream home.
So, for now, they are not paying attention to the daily fluctuations in the stock markets.
“We are only in our thirties. We have decades to get on the ship, ”saysJohn, who continues to automatically contribute to his retirement accounts. “If something should happen, we have plenty of time to catch up with it. “
Where is the market
The S&P 500, the benchmark index used for most mutual funds, recently recorded ten record closing highs in the span of 12 trading days, which is generally rare over the past half century. according to Bespoke Investment Group.
This could bode well for Wall Street later this year. After stocks hit new highs in clusters like this, median returns over the next six and twelve months were 5.5% and 14.4%, respectively, according to tailored data.
Market watchers, however, point to a larger problem: Fewer stocks are reaching new highs.
So why bother? In general, the size of the market, or the number of stocks participating in the rally, remains strong over the long term.
How do we know? What is called the 200-day moving average calculates the average price of stocks over that period. Over 90% of S&P 500 stocks are currently trading above their 200-day moving average. It’s a less irregular number and it takes a step back and signals how things look from higher up.
The shorter-term measures, however, tell a different story and suggest weakness in the months to come.
For example, only 31% of the 147 subsectors of the S&P 1500, which covers over 90% of the total market cap of the US stock market, traded above their 50-day average through Thursday, compared to 90 % in May. 7, data from Lowry Research shows.
Fewer new highs among stocks are like a canary in a coal mine: they are a signal of how market conditions may change. This implies that a decline in the stock market could approach, according to analysts.
So when will there be a bigger pullback?
As of Tuesday, it has been 293 calendar days since the S&P 500 has fallen 5% or more, according to the CFRA. This goes against a historical trend. Since World War II, the average has been 178 calendar days.
The stock market typically experiences about three declines of more than 5% per year on average. This makes the market more vulnerable in the short term following some signs of investor complacency, analysts said.
No one knows for sure when the next significant drop will be, but the so-called “techies” of the market are watching these indices to gauge when the trend might start to change.
The stock market’s lack of scale worries some short-term analysts. If only a handful of sectors are driving the market advance, then analysts become more skeptical about the market’s trajectory.
If you have a 20-horsepower car, it’s more likely to go faster and farther than a two-horsepower car, Stovall explained.
The finance, industrial and materials sectors, which stood out earlier this year, have struggled in recent times as home economy-winning technology has gained ground after weakening. in recent months after investors moved away from growth stocks and shifted to value companies instead.
Big Tech is a disproportionate share of the S&P 500, and the performance of larger stocks can have a disproportionate effect on the index. But technology leading the way isn’t necessarily a bad thing in the long run, according to Willie Delwiche, an investment strategist at market research firm All Star Charts.
“It’s not a problem when the technology leads the wider market higher,” says Delwiche. “It’s a problem if the rest of the stock market doesn’t follow suit.”
Currently, defensive sectors of the stock market, such as utilities and consumer staples, are not leading the charge. These types of so-called security stocks have regular dividend payouts, which become more attractive in times of economic uncertainty.
If they were currently pushing the market higher, that would usually be a red flag, Delwiche added.
Equities should benefit from the economic recovery
Granted, a bear market, or a drop of at least 20% from record highs, is probably not any time soon, analysts say.
The stock market is expected to continue to rise in the second half of 2021 and beyond as the economy recovers from the pandemic. This expansion is propelled by a strong housing market, robust consumer spending, better-than-expected corporate earnings, a healing job market, and unprecedented political support from Washington and the Federal Reserve.
At this point, the shocks along the way are not surprising to analysts, as the market reacts to tensions between better economic growth and corporate earnings and concerns about rising taxes and rising interest rates. , according to analysts.
Although the Fed has signaled that higher inflation is likely to be temporary, investors are increasingly concerned that the central bank will raise borrowing costs sooner than expected, which could increase market volatility. The June Consumer Price Index showed inflation was rising at its fastest pace in more than a decade.
The second year of a bull market also tends to be choppier, with positive but moderate returns and periodic pullbacks. Going back to 1957, the average return in the first year of a bull market is 43.3%, compared to 13.3% in the second year, according to Truist Wealth.
Looking ahead, techs are watching the NYSE Anticipated Fall Line, an indicator that tracks how many stocks are rising minus the number falling each day. He recently reported that fewer stocks are reaching new highs.
But there is a silver lining: Fewer stocks hit new lows last week. And that’s a positive sign because problems start when there are more new lows than new highs, according to Delwiche.
“We are seeing an absence of strength, not a sustained emergence of weakness,” says Delwiche. “The number of stocks hitting new lows is not rising, which is a sign that the market may recover.”
What should you do
As George Constanza once said: Do the opposite. So if stocks go down, increase your exposure to them, Stovall says.
For those with long-term retirement, history suggests it’s best to stay seated, he added.
“There are times when you might want to buy stocks aggressively and other times when you might want to sell stocks. Then there are times when you just do nothing and go fishing, “says Delwiche.” This is the third time. “
And Courtney Johns takes that to heart.
“I am very type A and neurotic. So I’m now learning in my 30s that I can’t control everything, ”she says. “For me, not paying a lot of attention to what the stock market is doing is taking care of myself. I already have so many other things to obsess over.