The greatest risk to economic growth and the stock market. Is buying Dip still a good strategy?
The S&P 500 and the Nasdaq are trading again towards new all-time highs. The S&P 500 has now reached 54 record closing highs so far in 2021 and is up + 23%. Only 1964 and 1995 saw more than 50 new highs before the end of August. In fact, the all-time record for new highs in one year is 77, set in 1995. Trend watchers note that 2021 is only the 11th time since 1928 that the S&P 500 has gained + 20% or more in the first 8 months of the year. With the exception of the two great stock market crash years of 1929 and 1987, the S&P 500 managed to maintain a solid double-digit gain late in the year, according to Bank of America research.
Bear vs. bulls
Bears, however, are quick to point out that the S&P 500 has not suffered a pullback of at least -5% or more throughout this year’s rise, which typically happens about three times a year. Generally, corrections of -5% to -10% are considered healthy. Bears of course think stocks are grossly overvalued in large part because of Federal Reserve monetary support and “easy money”. Once the Fed starts cutting asset purchases and raising interest rates, the bears believe investors will take a more “risk-free” stance and that the bullish rally in equity markets will correct itself to some degree. measure.
Overall, the bulls seem comfortable with the start of the Fed’s asset purchase “dip” later this year and this is in part due to the insistence of Fed Chairman Jerome Powell, that the economy “still has a long way to go” before rate hikes are on the table. The bulls are also expecting a second round of ‘reopening boom’ after the current wave of coronavirus has passed. Keep in mind that this wave cut short the surge in non-Covid summer spending that everyone had anticipated, so bulls believe that pent-up demand will be spent in the quarters to come.
What to watch?
The biggest risk to economic growth right now is not on the demand side but rather on the supply side, as shortages for everything in all areas limit the amount of goods and services available. Demand in the midst of the Covid summer surge has cooled a bit, which may be a good thing in the long term, as some manufacturers have a minute to catch up. And again, the bulls think this just creates another layer of pent-up demand that consumers will later satisfy.
As for next week, remember that the US equity, bond and commodity markets are closed on Monday, September 6 for Labor Day. The short week will also be dimly lit with only the Fed’s beige book and July consumer credit on Wednesday, and the producer price index on Friday. Next week’s revenue will include Caseys General Store, Lululemon, GameStop, Oracle, Z-Scaler, Academy Sports, and Kroger to name a few.
Sp500 recovered despite a weak NFP. There is only one reason for such a reaction: the Federal Reserve still fails to tighten monetary policy. However, cycles predict the best downside buying opportunity in October if other conditions are present. We certainly can’t judge now whether it’s going to be compliant by other tools.
We have a bearish ADL divergence on a daily chart and this will potentially play out well and create a buying opportunity in October. However, I have to say that there is still a good build up in this market. So, I think if this market gives a sell signal in September, traders should cash in their positions pretty quickly. We are in a strong uptrend and so far all fundamentals are still supporting the stock market.