The S&P 500 Index (SPX) has been in an unstoppable decade-long bull run and it is a few points away from the all-time high of 3,028. However, the impressive uptrend in U.S. stocks is making some investors jittery. A market that is consistently printing fresh…
The S&P 500 Index (SPX) has been in an unstoppable decade-long bull run and it is a few points away from the all-time high of 3,028.
However, the impressive uptrend in U.S. stocks is making some investors jittery. A market that is consistently printing fresh highs can be a cause for concern. Many believe that the steep uptrend over the last ten years is no longer sustainable.
The popular Elliottician BenjaminBlunts thinks that the S&P 500 has already topped out:
BenjaminBlunts is not alone to have this sentiment. Trader Adam Mancini also thinks that the SPX has become bearish. In a tweet, he wrote,
Bulls aren’t out of the woods just yet.
However, Alex Kruger, an economist and analyst, thinks that the fear surrounding U.S. equities is unfounded. The widely-followed analyst believes that the SPX is likely to continue humming in the next few years.
In technical analysis, the trend is your friend. In other words, if an asset is in an uptrend, it will very likely to continue the trend until it shows clear reversal signals. So far, it appears that Mr. Kruger has yet to see any bearish signals from the S&P 500 Index (SPX).
The economist exclusively spoke to CCN. He said:
I’d say stocks topping out now is nonsense. Stocks are in a multi-year bull market. The trend is up. The all-time high is less than a couple percentage points away. It is statistically improbable for the top to be in.
The trader added:
The question should be the opposite: why would the top be in? Bears have been wrong over and over and over again. Most bears have been bearish for years. Why are bears correct right now?
There’s a lot of truth in Mr. Kruger’s statement. A quick search of the term “SPX Topped Out” on Twitter reveals a slew of bears getting slain since 2014.
In addition to technical reversal signals, a top is more likely to form if there’s a huge fundamental shift in the economy. Many say that the inversion of the US yield curve may act as a bearish catalyst.
In August, the main yield curve inverted for the first time in 12 years. On that day, U.S. stocks plummeted as fears of a recession gripped market participants.
Nevertheless, Alex Kruger thinks that it is not yet time to push the panic button. He said:
The US yield curve may have inverted, yet the inversion was partially driven by technical factors, partially by safe-haven flows, and partially by the Fed and the ECB (European Central Bank).
The trader added:
A curve inversion historically precedes a recession; yet the lag is considerable. Stocks usually move higher over the next 1-2 years. Furthermore, the curve has been steepening sharply since China’s friendlier stance last week. Safe-haven flows ebbed, and the deflation theme quickly started fading away.
Statistics support the economist’s statement. According to CNBC, on average, it takes 22 months for a recession to occur after a yield curve inversion. More importantly, not all inversions lead to a recession, especially when bond markets are distorted by global factors (like they are now). Thus, it appears that the investor panic last month was a false alarm.
One crucial reason why the economist doesn’t think that a market reversal is bound to happen soon is because of the Fed and its repertoire of financial tools. According to Alex Kruger,
The Fed is the key variable. It can lower rates, and increase its balance sheet considerably.
With the Fed’s ability to keep the rally going, Mr. Kruger said the economy is likely to continue bustling for some time before a downturn kicks in. He also noted,
I think it is reasonable to be on the lookout for a top during Trump’s second term. Not just yet.
The SPX may eventually top out and the bears will finally get it right. But not just yet according to this analyst.
Last modified: September 12, 2019 3:54 PM UTC