Published March 15, 2019
This week the stock market appears to have passed the first test of the strong rebound. The chart below tracks the market over the past two years from the hefty uptrend of 2017 through the turbulence of 2018. The uptrend was marked by consistent support where buyers came in, typically at the 50-day or 200-day moving averages (see all the green arrows below as investors buy stocks at the two reference lines on the chart). Once that support was broken in October the question became how serious the decline would be. It turned out to be rather serious, at least it appeared that way in December as stocks vaulted downward in big chunks, day after day. But then, as often happens in the stock market, bullish investors waded in to pick up perceived bargains. Their 10-week buying spree proved enough to turn the market around.
Next, the question becomes whether that initial rally has been enough to solidify a change in investor expectations – turning them from fearing further declines to fear of missing out on further advances. If the bulls can change the market psychology to a fear of further advances, then stocks will find buyers at every dip. Last week’s five day swoon offered us a view into that psychology. And the market has responded well so far, with buyers coming in where expected (bright blue arrow below on the right).
The remaining concerns are that defensive bonds and utilities continue to receive favor. Those are cautious assets, built for investors preferring yield over growth in price. In a strong market uptrend, investors will shun yield in exchange for buying assets with growth potential. See below how strong utilities have been over the past few weeks, reaching new highs and being every bit as powerful as the broad stock market.
The other remaining concern for stocks is that all stocks are not quite participating in this uptrend. The chart below shows the performance of the “average” stock. We can see that the average stock hasn’t yet managed quite the same upward thrust as the megacap stocks that power the S&P 500. They’ve rebounded along with the market; but appear to have stalled this week. This action, along with the rise in utilities and remaining preference for yielding assets, speaks to the underlying caution investors feel toward the U.S. economic outlook. They know the economy is slowing. How much and how long, they have no idea. So a bit of caution remains. However, the stock market appears to have survived its first real test of this uptrend reasonably well.
Investors strongly bought the prior week’s dip, the first market slip of any note in ten weeks. Monday saw investors pile back into stocks with a +1.5% gain led by tech/consumer shares. Strength in Apple (AAPL) on an analyst upgrade, and in semiconductors on an acquisition in the space, provided the encouragement. Stocks held the gains with a +0.3% showing Tuesday. A report showing inflation at low levels reiterated the market’s belief that interest rates will remain on hold for the foreseeable future. Wednesday added a third straight positive day for stocks with a +0.7% increase. Investors were pleased as the S&P 500 pushed above resistance at 2800, a level that had held the rally in check a couple of weeks ago. A flat day Thursday gave way to more buying Friday. Markets lifted +0.5% with tech/consumer stocks once again the driving force. Semiconductor firm Broadcom (AVGO) provided support for the sector with a solid earnings report and positive outlook, tempering fears of a global economic slowdown.
A positive week for stocks saw market indexes recouping the prior week’s dip. The S&P 500 (SPY) rose +2.96% while the Nasdaq 100 (QQQ) surged +4.19%. Small-cap shares (IWM) underperformed with a +2.04% lift, finding themselves struggling to overcome resistance with their large-cap brethren have now cleared.
Warm wishes and until next week.