Margins May Be Close To Plummeting

The stock market is at a very interesting juncture because its rally has been impenetrable despite the global economic slowdown. The 20% decline late last year probably wasn’t warranted because there are few signs America is headed for a recession. The trade war cooling off and the dovish Fed have also acted as positive catalysts to drive stocks higher. President Trump stated he wouldn’t raise tariffs on China on March 1st because progress is being made with the negotiations. The Fed had gone from projecting 3 rate hikes in 2019, to expressing that it will have patience because of the global slowdown. At the Fed’s next meeting in March, it should project fewer than the 2 hikes it guided for in December.

Just because stocks should be higher than the Christmas Eve bottom and there were two positive catalysts since then doesn’t mean stocks should rally indefinitely especially since the economy is mixed at best. Specifically, as of February 25th, the S&P 500 was above its 10 day moving average for 35 days which is the longest streak in 9 years. The longest streak ever was 59 days in 1971. The chart below shows the historical 2 month rate of change of the S&P 500. The S&P 500 is up 18% in the past 2 months which is only comparable to April 2009, November 2001, December 1998, March 1991, October 1982, and February 1985.

It’s human instinct to immediately sell sharp rallies because you think they can’t continue. However, you need to do more research than just looking at the price action because there are numerous instances where rallies have led to more rallies. For example, when the stock market has been up in January and February since 1950, stocks are up in the next 10 months 25 out of 27 times. The average return is 12.1%. When the 12-month rate of change in the S&P 500 goes from -5% to positive (similar to now), it’s almost always a bullish sign.

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