I don’t like to make market directional calls because I don’t believe anyone can consistently make accurate predictions most of the time. Moreover, one would look silly for getting the calls wrong too often.
But there are rare occasions where I will stick my head out with a call. Currently, I believe that the bull run is back, and I’m willing to share my analysis with you.
Let’s review the critical turning points for the S&P 500.
Following the S&P 500’s low point of 3,492 on October 13th, 2022, the index experienced a rally and reached 4,195 on February 2nd, 2023 – a 20% gain from the bottom to the top in less than four months.
This impressive rebound can be attributed to a decrease in inflation rates, increased clarity around the peak interest rate, and growing expectations that the Fed may slow down the rate hike.
After hitting its high, the price of the S&P 500 retraced as is typical for market fluctuations. However, the recent collapse of Silicon Valley Bank on March 10th, 2023, led to the index dropping below the 200-Day Moving Average – a critical indicator for me in determining a market’s bull or bear state.
The recent collapse of Silicon Valley Bank and Signature Bank, coupled with the need for authorities to intervene and save Credit Suisse, has sparked renewed fears of a banking crisis similar to the one that occurred in 2008.
As the situation worsened, it became increasingly clear that the problem had the potential to trigger a catastrophic crash. Given this level of uncertainty, I personally did not have the confidence in buying stocks at that point in time.
While it can be lucrative to buy when there is fear in the market, the situation may deteriorate further. It is hard to predict the market bottom and premature purchases can result in significant losses as a result. The safer way is to wait till we have some confidence that the worst is over before buying.
The recent developments surrounding the banking crisis seem to indicate that the situation has been largely contained. While there is still a risk that additional banks may fail, the fear does not appear to be as pronounced as it was during the peak of the crisis, particularly if the failures are limited to smaller, less well-known banks.
The banking crisis has put the spotlight back on the Fed, and investors are hopeful that it will consider slowing down or stopping the rate hikes, given the impact that interest rate hikes had on the crisis.
The content below was originally paywalled.
It’s worth noting that the rate hike was expected to be 0.5% prior to the crisis, but it was reduced to 0.25% as the crisis unfolded. This reduction had a positive impact on the market.
In my opinion, the Fed will continue to be cautious and avoid hiking rates as quickly as before. It’s clear that something has broken, and the Fed needs to take a more measured approach to avoid destabilizing the market. This is good news for the market, and it may be the reason why tech stocks have been rallying.
From a technical analysis perspective, the recent movements of the S&P 500 suggest that it has returned to the bullish trend that started in October 2022. This is indicated by the fact that the index has managed to close above the 200-day moving average for eight consecutive trading days and has also broken above the upward sloping trendline, as seen in the chart below.
In addition to the recovery in the US market, there has been a similar rebound in China stocks. The iShares MSCI China ETF has also closed above its 200-Day Moving Average for 5 consecutive days, indicating a potential return to a bullish trend.
I believe that the current market conditions present a safer time to buy stocks compared to the peak of the banking crisis. Even at this point in time, there are still reasonably priced stocks available to invest in.
Of course, there is always a possibility that the stock prices may fall, and I could be wrong in my assessment. But I always find it more beneficial to be bullish when things aren’t looking good yet.
