5 Things To Expect After The Sell-Off
Stock investors received a painful wake-up call in October. Riding high on bull market-induced complacency, market players were shaken to the core as the major indexes plunged over 4% in a concise period. The plunge came after the S&P 500 booked over 10% gains for 2018 on the back of tax cuts and other fiscal stimulus.
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Most investors, as always, wrongly believed that the upward move would last forever. Even corporate tax cuts and a pro-business president could not counteract the 10-year Treasury yield hitting seven-year highs and international tensions sweeping the world. Remember, global stock markets have posted an average 5% negative return in 2018, while the U.S. market remains dramatically higher in comparison.
#-ad_banner-#The most important lesson from October’s rout is that markets never go straight up. There are always sharp declines on the way higher. These sell-offs are how the market rebalances and fuels itself for the next move to all-time highs. Expect and use these times of fear to profit!
History and experience tell me that we can expect certain things to happen to the stock market after sharp declines. To be sure, nothing is guaranteed to occur, but the odds favor that history repeats with specific things occurring time after time.
Here are 5 things to expect after the sell-off:
1. Volatility Will Spike
2018 began with an extreme volatility spike. The VIX volatility index rocketed to 50 after languishing sub-20 for all of 2017. The VIX attempted to take out these yearly highs during the October plunge but quickly failed just below 30 after a two-week march higher.
Volatility has been unnaturally low over the last few years. It appears that the beast has been awoken and we can expect a more natural progression of periodic VIX spikes going forward.
These spikes and market plunges can be used by savvy investors to buy low and sell high. I am looking forward to the VIX returning to historical norms!
2. No Recession, No Bear Market
I stand by my earlier forecast that we will not see a bear market or recession for quite some time. Right now, I think it will be at least another 11 months until the bear market rears its ugly head.
The market’s resilience was proven both in January and October this year. The colossal trend fund computers did as they are programmed buying the dips, and I fully expect the institutional “buy the dip” to continue.
Most importantly, the fundamental U.S. metrics remain bullish despite the recent selling. This bolsters my bullish sentiment.
3. Expect More Sharp, Short Declines
Do not expect that the sharp declines have ended. I expect the frequency of plunges to increase and perhaps even become more severe. The volatility genie is out of the bottle, and there is no putting her back inside!
The chaotic nature of our current national leadership combined with the ever-changing landscape of global affairs directly counteracts the bullish internals forcing the sharp, short lasting selling.
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The market is merely experiencing the classic news/rumor panic selling, dip buying scenario. However, this time it’s on steroids thanks to the trading machines and out-of-control news flow.
4. Tech Has Not Topped
I fully expect the tech sector to move higher shortly. The reason being is that valuations remain in check for the major tech names. During the significant tech crash of 2000, tech stocks traded at a 200% premium, in 2018, the premium is only 30%.
While there are issues such as the tariffs and the Chinese “spy chip” scandal among others, they are minor for the long term.
Also, the reclassification of the tech sector to include a wider variety of companies will help spread the risk across once differing industries.
5. The Fed Remaining Accommodative
Despite the recent rate increases, the Federal Reserve remains accommodative to the market. Learning from their past, the Fed avoids shocking the market by making moves without telegraphing them first.
The current rate increase regime expects just four more quarter-point increases by the end of 2019.
Unless a black swan event occurs, I fully expect the Fed to stay with its bullish plan.
Risks To Consider: Forecasts are just that — forecasts. At any time they can be revised due to changing information. Remember, the stock market can and will do the unexpected!
Action To Take: Continue to wisely buy the dips after every sell-off. I like waiting for the market to bounce higher after the selling to get long rather than trying to time to the exact bottom. Also, dollar cost averaging into a position makes particular sense during times of increasing volatility.