At Cornerstone we’re fairly bullish on 2020 growth from a fundamental perspective. That said, there are potential bumps in the road. So, we want to be cognizant of the short-term risks over the next six weeks or so.
The Market is Rolling
Our case for 2020 is bullish and the year’s early performance is backing that up. The S&P 500, Dow Jones Industrial Average, and Nasdaq composite all hit new lifetime highs this year.
This is the result of liquidity from the Federal Reserve’s loosening balance sheet, along with the passage of phase 1 of the trade deal with China, the United States-Mexico-Canada Agreement (USMCA), and reacceleration of growth. They are the latest catalysts to pull the $1.4 trillion in investable funds off the sidelines and into equities.
Source: gfycat.com/measlyhopefuljackal
Many people bet we’d run into resistance on the S&P 500 around the 3,300 mark, which would likely lead to a welcome 5 percent correction (in some circles). But like the Tennessee Titans’ Derrick Henry against the Baltimore Ravens, the S&P 500 blew past everything, creating momentum that could last for weeks. Although the coronavirus has created a hiccup recently.
Everyone Wants In
Because of this momentum, the market has broadened.
Not just a few sectors are supporting this recent run. Rather, the majority of all the S&P 500’s 11 sectors are rushing ahead. We’re seeing hundreds of large cap stocks just getting in the game, fueling the run.
However, that’s also leading to the current market being overbought. Technical indicators are extended for this market. And as the table below showing institutional investor activity indicates, buy signals far outweigh sell signals (see far right of table).
Mapsignals’ Big Money Index measures institutional investments on a scale ranging from oversold to overbought. The lower the percentage, the more oversold the market is, meaning we can expect a jump. The higher the percentage, the more overbought the market, which means a pullback could be on the horizon.
The index was at 87.6 percent, as of last week, clearly indicating an overbought market. This level of buying is unsustainable. As such, we’ll likely see a short-term pullback.
Reign in to Move Forward
But that’s a short-term analysis. Over time, there is room for the bull market to run, it’s just that the timing isn’t great right now. When the Big Money Index begins to fall, that’s a signal we look at that shows the top has been hit and a pullback is imminent.
We can’t in good conscience look at the current situation as the ideal time to enter the market. That means it’s a good opportunity to control the FOMO (fear of missing out) as a result of this momentum.
Simply put, the market needs a reset. Then it can move forward based off earnings.
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