March 3, 2018
Our last post from February 14th argued that the stock market is undergoing a healthy correction, which is not over yet. Since then, the stock market moved up and it is now back to the February 14th level. And the day is not over yet. Volatility is comfortably up on increasing volume, which is not good for the market.
On the other hand, we strongly believe that a bear market is not in the process. Corporate earnings and sales keep accelerating. Economic recessions are likely to see steep drawdowns in stock prices. But economic recessions are not likely to happen when the trend of corporate profits is positive (earnings and sales accelerating).
The Q4 2017 earnings season is almost complete and the results are fantastic, with bottom line accelerations in every sector of the S&P500 Index. Although these numbers will be a tough comparison to beat in the future, after the interest rate hikes in 2017 and another in the pipeline for later this month, we expect GDP to slow down with tame inflation, regardless of the FED’s estimates. Nonetheless, all this is far from recessionary.
From a trading perspective, we took healthy profits after the run up in January, added positions on the reversal of February 9th, took gradual profits again on the way up to February 28th and we are ready to go back in as soon as we see another reversal taking place. On the positive side, technology is the sector that continues to show strength and leadership.
Last, but not least: a pullback may last for a few weeks (you may estimate 3 to 5) with a relatively shallow price move (you may say 5% to 9%). A correction may last longer than a pullback, 4 or 5 weeks to 10 or 12 weeks with a bigger drawdown (at least 10%), but not enough to change the main trend from bullish to bearish. With enough time, the damage to change from bullish to bearish trend may occur. No one knows ahead of time when and if the trend will change. The only thing an asset manager can do is monitor and map the market behavior every single day. So far, from the high of January 26th to the low of February 9th the drawdown in the S&P500 has extended ~ -11.5% (refer to the chart below). The mid-term and long-term trends remain bullish. Follow your process to analyze the market. This is definitely not a part-time job.