How Corrective Waves Create Future Returns
As we trek through the window of "empty data flow" and await improvements in GDP and earnings beginning in mid-October, it’s important to be aware of what’s happening on the investor sentiment front.
First, the internal price structure. The chart below tells the breakdown of the fear story in price terms.
The data shows the percent of overall stocks above the 50-day moving average.
The lower the number, the higher the fear, the better the long-term values:
The answer is 24.8%.
That means 75% of all stocks are now below their 50-day moving average.
The blue box shows you the contrary lesson. And remember, this is a 20-year time span. So, look at how the blue box shows the relatively small amount of time that has been spent below this level.
Sure, it’s volatile. But the larger issue is that we’re approaching values (read: fear) that we’ve only seen on rare occasions.
So, what happened:
- After mid-2009?
- After later 2012?
- After election time in 2016?
- After Christmas 2018?
- After March 2020?
Folks, risk falls as prices do.
And that’s precisely the opposite to what fear makes us think will happen.
The lesson? Well, long-term investors should recognise volatility and corrective waves as a required part of the market.
They create the future returns.
How About the 100-Day Average?
Well, it’s not "as crunched" as the 50-day but note that only 41% of stocks are left above their 100-day moving average.
This is well into the lower end of this data range – but the lesson is the same.
Think about what happened AFTER all those other previous lower points?
A brief study of the data will show you this: The subsequent rallies back up the mountain were not small.
As for Sentiment...
It’s just where you would expect it: In the tank:
It’s almost 2-1 on bears, and the record setting weeks of more bears than bulls (second chart) will notch forward to 31 weeks once updated.
Ok, so it’s obvious things are being affected by the political chatter, innuendo, and media vitriol.
I can’t get 7-8 minutes into a newscast anymore before feeling ill.
But don't let it ever define your investing plan.
The crowd hates stocks, the experts hate stocks, the fund managers like cash, consumers have $18 Trillion in banks…heck even newsletter writers hate stocks.
One More Thing
The latest earnings data from Refintiv shows that trends remain up, despite the bad news headlines:
- The forward 4-quarter estimate this week is $146.42 versus $142.15 last week.
- The data suggests this number increases to about $164 for 2021 and $179 for 2022.
- The estimated 2020 and 2021 S&P 500 EPS growth rate "average" for the two years combined is still 4%, a constant now for 23 weeks.
- Take that 2021 number and you have a market closing in on a P/E of 19.
Expect more chop, remain patient, and keep your focus on the facts.