Bullish US Equities After a Pullback
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Bullish U.S. Equities (After a Pullback)
As the stock market continues to soar, investors are left wondering if the upward trend will persist or if a pullback is imminent. With the S&P 500 already boasting a whopping 57% gain over the past two years, the potential for a correction is a real concern. In this article, we’ll delve into the pros and cons of a bullish outlook for U.S. equities, examining the risks and rewards of buying into the current market.
A Stretched Market
While it’s true that the S&P 500 has experienced a remarkable run, many investors are hesitant to enter the market due to its stretched valuation. A stretched market, by definition, makes for a challenging setup for entry. One can either opt for a long position, hoping that the index will continue to rise, or wait for a pullback to a support level and then take a shot. But which option is the most viable?
Risk Management
One of the key advantages of waiting for a pullback is the opportunity for risk management. A clear stop placement can be set below support, providing a safety net for traders. In contrast, buying into a stretched market without a stop in place leaves investors vulnerable to significant losses if the market turns against them. By waiting for a pullback, investors can set a clear stop and enjoy the peace of mind that comes with knowing they’re not overexposed.
Psychology of Trading
Over the long term, trading is often more about psychology than it is about technical analysis or fundamental insights. As humans, we tend to love winning and hate losing, which can lead to poor decision-making in the heat of the moment. FOMO, or the fear of missing out, is a common affliction that can drive investors to make impulsive decisions. It’s essential to remember that none of us can predict the future, and even the best forecasts are merely hypotheses. By keeping a level head and focusing on the facts, investors can make more informed decisions.
Clear Risks
While the prospects for U.S. equities may seem rosy, there are clear risks to consider. The pricing-in of higher inflations and long-term rates could lead to a growing opportunity cost of capital in the first half of next year. Additionally, the extended period of low interest rates has led to a normalization of the yield curve, which could increase borrowing costs for the U.S. government and draw capital out of equities and into bonds. However, it’s essential to remember that these risks are not necessarily bearish indicators.
Implied Third Mandate
The Federal Reserve’s "implied third mandate" – to maintain a robust stock market – is a significant driver of their decision-making. With most parties interested in seeing stock prices rise, the Fed is unlikely to implement policies that would significantly harm the market. In the S&P 500, a nearby area of support potential lies about 5% away from current prices, followed by a point of prior resistance around the 161.8% extension of the 2022 pullback move, which is about 7% away.
SPX Daily and Weekly Charts
For a clear understanding of the market’s potential trajectory, it’s essential to examine the charts. The SPX Daily Price Chart shows a recent gap produced by the U.S. Presidential election, which is approximately 5% away from current prices. The SPX Weekly Chart provides a broader view, highlighting the 161.8% extension of the 2022 pullback move, which is about 7% away from current price.
Conclusion
In conclusion, while there are valid concerns about a pullback in U.S. equities, the potential for a continued bull run remains strong. By acknowledging the risks and rewards of the current market, investors can make informed decisions and avoid impulsive moves. As always, it’s essential to remember that no one can predict the future, and even the best forecasts are mere hypotheses. With a clear understanding of the market’s dynamics and a willingness to adapt, investors can navigate the complex landscape of U.S. equities and emerge stronger and wiser on the other side.
