Free Weekly Analysis and Lookahead

Free End of Week Analysis and Lookahead

The S&P 500 finished the week 3% higher and was the third up-week out of the last four. Equally impressive is Friday closed at the highest levels in six weeks. And not to be overlooked, this week’s spread between the lows and highs was the smallest in two months. As dire as the economic headlines have been, the stock market definitely seems to be coming to terms with our new reality.

Is a relatively modest 15% decline from all-time highs enough to account for the largest economic shock since the Great Depression? At this point, the stock market seems to think so. My Thursday post touched on some of the reasons the market finds itself at current levels, namely most investors believe the economy will bounce back relatively quickly. While this is part of the answer, there are also other supply and demand factors at play.

One of the bigger contributors to this limited selloff is the fact many investors have already lived through stock market crashes. Most of us were around to witness the 2008 Financial Crisis that cut stock prices in half. And the more recent example of 2018’s Christmas massacre that saw stocks tumble nearly 20% between Thanksgiving and Christmas.

What was the biggest takeaway from both of these crashes? Stocks bounce back even higher. Reactive sellers were left behind when the indexes pushed to new highs without them. Regret is a powerful motivator and these investors were not going to make the same mistake twice. Fool me once, shame you. Fool me twice, shame on me.

At least for the time being, many would-be sellers learned to hold through volatile episodes and not succumb to the panicked feeling in their gut. Rather than impulsively sell stocks again, these investors are still hanging on. And so far discipline has been rewarded with prices dramatically above the March lows.

No matter what we think should happen, when confident owners don’t sell, prices don’t fall.  While we could see prices slip over the next week or two in a normal and healthy exhale, as long as the selling remains restrained and orderly, any dip is a buying opportunity, not an excuse to abandon ship. Short-term traders can exploit this weakness, but long-term investors should stick to their buy-and-hold plan.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM