Since the S&P 500 closing price on October 29, 2018 at 2,641.25, the S&P 500 has risen nearly 140 point as of last Friday’s closing price of 2,781.01. In percentage terms, that is 5.3% higher in 9 trading days. You may be wondering now if the worst is over.
In order to prepare for what may be ahead, I must be realistic. There was some technical damage done during October’s dreadful selloff. There were some things I was disappointed with in the October 29th low as well. That makes it much harder to give a definitive answer, despite the unsatisfying nature of that response.
First, I did not observe a market capitulation at session lows on Monday October 29th. A market capitulation is massive selling that has the taste of panic in it. Normally, we can measure that by looking at the CBOE Volatility Index (VIX). The high in the VIX, a common measure of market “fear,” reached only 27.86. Typically, the market is not deemed to be hitting high levels of fear until the VIX goes above 28, and many don’t consider anything less than 30 to be indications of fear.
Secondly, market breadth, the number of stocks participating in a general move of the market, has not resulted in a “breadth thrust,” which is a substantial number of company stocks all appreciating relative to the number declining on any given day. The best cases for market bottoms have been marked by extreme fear, followed by quick and decisive rebounds, or market capitulation followed by breadth thrusts.
Certainly, we can have market recoveries without the above mentioned two markers. However, much like the correction we had in early 2018, the recoveries tend to last a shorter period and not result in dramatically higher gains.
From the low in the S&P 500 to the high reached in September, we only saw a gain of 13.51%. The up- trend lasted less than 6 months from the low on March 2, 2018 to the high on September 20, 2018. That is not a very long run between market corrections. In the earlier part of this year we did not see any market thrusts, even though VIX did go over 30 in February.
There are a few remaining risks that will be focal points for the remainder of 2018 and into 2019. First the Fed interest rate hike anticipated in December. The market currently anticipates the Fed hiking rates a quarter percent.
More important than whether this rate hike happens will be the public announcement and press release immediately following the Fed decision. It will likely set the tone for expectations going into 2019 on economic growth, whether it is in fact slowing, or in danger of slowing faster than anticipated, and what we might expect in terms of further interest rate hikes. The market likely would prefer one hike in December with an indication that Fed might pause their rate hikes. We will be watching for that language.
Another point of risk is undoubtedly the Trade tiff with China. There are expectations that more and more evidence of the effects of this trade war will be seen in the economy the longer that our two countries go on without a trade deal. Should a trade deal occur, it could be an indicator that we could see greater returns in the market for the short and intermediate term.
Based on the facts, our opinion of the current market outlook is neutral in the short and intermediate term. We would expect to become more cautious and negative if we were to retest this correction’s lows of 2,641 on the S&P 500 and close lower, or if we see evidence of economic slowdown. In order to have a more bullish view we would look for a successful retest of the lows of 2,641, cyclical and small-cap stock leadership, breadth thrusts and strong economic growth.
We can still make money with a neutral outlook. It just tends to not be quite as smooth but also not quite as frightening as a bear market either. Returns in a neutral environment also do not tend to be quite as high as a bull market, although growth is better than no growth!
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