After six months of frustrating swings of the pendulum with virtually no net movement, it seems the market breakout we’ve long been anticipating has finally arrived.
Stocks edged out to new all-time highs on Monday, picking up where the end of last week left off, when the S&P 500 broke through three-month resistance on Friday. The index is now up 5% in the last three weeks, and has risen for four straight days.
But the break to new highs isn’t the only reason to believe that a sustainable market breakout is upon us. Here are four other promising signs/factors:
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Market Breakout Signs
- The Plummeting VIX. The CBOE Volatility Index (VIX) is down to 12 as of this writing, its lowest point since July, and down from as high as 20 earlier this month. Because the VIX is a forward-looking, options trading-based indicator, the sharp decline in volatility looks like a sign that investor fears—related to trade war, impeachment, a potential recession, etc.—are fading.
- The Calendar. Seasonal investing isn’t something you should swear by. But historically, November and December are the two best months for stocks, and the end of the “Sell in May, Go Away” period. That wasn’t the case last year, when the fourth-quarter market correction actually accelerated in one of the worst Decembers ever for stocks. But Black Friday and the holiday shopping season are typically good times to invest, and it usually starts shortly after Halloween.
- The Fed. The Federal Reserve is expected to slash interest rates again this week. Economists are putting the chances of a third straight cut of the federal funds rate at 93% when Jerome Powell makes an announcement on Wednesday. Interest rate cuts historically are not a good thing for stocks in the long term, but they usually provide a short-term jolt—though, given the overwhelming odds in favor of a rate cut, it’s likely already baked into the market’s cake at this point.
- Our Market Timing Indicators. Mike Cintolo, our resident market expert and Chief Analyst of our Cabot Growth Investor advisory, has developed three market timing indicators that measure the intermediate- to long-term health of the stock market. As of this writing, all three of them are positive.
Here’s what Mike wrote last week about his Cabot Trend Lines indicator, which is determined by the 35-week moving average of the S&P 500 and Nasdaq:
“It’s easy to lose sight of given the seemingly endless chop and growth stock weakness, but the bull market is alive and well. Despite no net progress for five-plus months, our Cabot Trend Lines remain positive, with both the S&P 500 (by 2.7%) and Nasdaq (by 2.2%) finishing last week north of their respective 35-week moving averages. This is one of the big reasons that the market’s next big move is likely up.”
Bottom Line
We’re not weathermen at Cabot. We try not to forecast what might happen next with the market; we simply go off the evidence in front of us. And right now, the evidence – new all-time highs, plummeting VIX, our own market timing indicators, etc.—is overwhelmingly in favor of this market breakout being the real deal.
Of course, the latest alleged peace treaty with China could collapse and prompt yet another trade war-induced pullback. Or third-quarter earnings season could worsen. Or, there’s a 7% chance the Fed could throw a curveball and not cut rates again on Wednesday, which could cause temporary panic.
But odds are, a month from now share prices will be higher than they are now. And hopefully the trend will continue well into 2020.
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