Ignore the Traders: Long-Term Trends for Stocks are Still Intact
In the modern world, where a combination of social media and the 24-hour news cycle means that we are constantly bombarded with opinions, it is more important than ever to distinguish between trading and investing. The two are often confused, but they are not the same. You can mix it up to some extent, and can even do both at the same time, but when you do so, your goals, and more importantly, your timelines, differ depending on which you are doing. Trading is inherently short-term, with positions that are usually held for minutes or maybe hours, rather than the months or years that you would expect to hold an investment.
So why do investors so often listen and react to the opinions of traders?
I’m not sure I know the answer to that question, but I do know that even I, someone who worked in dealing rooms for twenty years and have been investing for around forty, can sometimes do the same thing, especially when I should know better. This morning, for example, I was listening to a trader talk on a financial network about how this morning’s indication of a lower opening after the first down week for a while was a seriously bearish signal, and I started to worry. Should I sell some, or all of my holdings? Or should I at least take out a sizeable hedging position by buying a leveraged inverse ETF or a VIX tracker?
Then, as part of my normal morning routine, I looked at 1-year and year-to-date charts for the S&P 500 with the 50-day simple moving average (SMA) overlayed on them and realized that I was making exactly the mistake in my thinking that I so often advise others against. When you look at this chart, being panicked into a move at this point would obviously be completely crazy:
The short-term view may be that the accelerating declines that are evident this morning point to continued selling, but the longer-term picture shows this to be neither new nor cause for concern. Since the beginning of the year, ES has challenged that 50-Day MA seven times. While it has often traded below it briefly during that stretch, it has never closed below it for two consecutive days and has always bounced sharply back and continued the upward trend.
Obviously, that is no guarantee that this time the average will hold, but until I see a break of the pattern, I will trust history over short-term momentum trends.
"Ah," the bears will say, "this time is different. We have the delta variant to deal with."
That is true, but I am not sure that the economic impact of delta will be significant. The massive crowds in Milwaukee’s “deer district” celebrating their team's win in game 5 of the NBA finals over the weekend didn’t seem too worried about it, nor did the crowds at the British Open Golf Championship, held in a country where it has hit hard. Even mask mandates are proving difficult to enforce in affected parts of the U.S., so the idea of another shutdown, or sweeping stay at home orders, seems to have little-to-no chance of happening.
The spread of delta may cause some people to be a little more cautious again. It may delay the full resumption of international travel and cause a few more people to question the wisdom of, say, a cruise vacation. It may even extend the work from home or hybrid working models employed by a lot of companies. To be bluntly grim, unless it starts to kill in massive numbers, it won’t have a big economic impact.
What we are left with is a market still supported by fiscal and monetary stimulus, and an economy that is beginning to show the inevitable effects of that two-fronted push. Earnings are beating expectations, too. You could say that is nothing to write home about because they always do, but the one real problem with stocks is high multiples, and three-quarters of companies beating expectations will change that. It will bring down trailing P/Es by raising the last year’s total earnings even if the market were to stay flat, so a pullback will make stocks attractive again.
So, ignore the traders, at least for now. True, their charts and indicators are flashing warning signs, but those signs are only relevant to the next few days and the next five percent or so on the S&P. If the current bond and dollar buying continue throughout the week, and/or if we break the 50-day MA on ES and stay below it, I will reconsider, but until then, this move looks like just another consolidation.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.