This week the stock market gave investors the largest decline they have seen in more than a year. In doing so it is my opinion that the stock market has also given investors the best buying opportunity they have seen in over a year.
The S&P 500 Index* was down 3.85% for the week ending 2/2/18, representing the largest weekly decline since early 2016. This drop has some investors asking if this it is time to sell everything and run for cover. However, other investors are eyeing this decline as a potential entry point, allowing them an opportunity to put new money to work and “buy the dip” as they say on Wall Street.
So, who is right? Is this weekly decline just the beginning of the next financial Armageddon? Or is this a golden opportunity for investors to get cash off the sidelines and into the market in preparation for a continuation of the bull market?
I am of the opinion that while we may well see some short term weakness in equity markets, the bull market still has some room to run to the upside. Following are a few of the data points that tip my scales in favor of the bull market.
There is an old investing adage that “the trend is your friend”. Practically speaking, this means that so long as the prevailing trend (whether up or down) remains intact, it is a fool’s errand to invest contrary to that trend.
This past year has seen one of the strongest bull market up-trends in the history of the stock market. This week’s modest decline feels scary only because it has been so long since we have had any kind of meaningful dip in the market. While it is true that at some point the party is going to be over, it is premature to throw in the towel. By definition, a bull market cannot be over until the uptrend line has been broken, and we have a ways to go before prices are in danger of falling below that level.
Objects in motion stay in motion until acted upon by an outside force. That is true in physics and investing as well. To date, there has been very little resistance hindering the charge higher in equity markets. The resulting momentum in stocks is literally off the charts, and are at levels higher than I have ever seen.
Strong momentum does not preclude a decline in stocks; however, what it does strongly indicate is that the market is not ready to turn on a dime and immediately plunge lower in a sustained fashion. For a trend change to take place, first the upward momentum would have to be worn down, typically by choppy up and down movement, a series of dips and jumps in prices. If we see sustained choppy-ness in the market, rather than a sustained upward move, then it is possible that the market is working on building out a top. But tops take time to form and it will take time for the momentum to be sucked out of this market before any serious decline begins to take shape.
There are numerous levels of support just a few percentage points below current levels. Market prices tend to bounce off of these support levels, which are indicated by such things as previous highs and lows, moving averages and trend lines.
Over the past two weeks, prices have become overextended and stretched far above these support levels and it is makes sense that they should snap back like a rubber band after such a stretch. This week’s decline has brought prices back down to those support levels and until those levels are broken, the uptrend remains intact and the rally is still on.
All that said, I could be dead wrong. But, even if I am, investors would be wise to avoid falling prey to fear. Fear and greed are the two most dangerous emotions for investors. They cause you to make unwise, irrational and harmful decisions…typically at the worst possible times.
During market declines, fear is highest at the lowest point in the market. And the lowest point in the market is precisely the WORST time to sell, but ironically it is often the point when MOST people end up selling because they are just plain afraid.
Don’t fall into that trap.
Stick to your long term investment goals and strategy. If you do not have a long term goal and strategy, then you need to get one right away. If you need help or guidance with your plan, the Christian financial advisors at Christian Wealth Management are a great resource for sophisticated, biblical financial guidance.
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