Longer-Term Investors Need To Keep Seatbelts Fastened On Bull Train

Executive Summary:

The current narrative in the stock market appears to be that with the president and a bunch of White House staffers and Senators having contracted COVID, the chances of a stimulus bill have improved over the last few days. In response, stocks have rallied on the hopes that a deal can get done before the election – or at the very least, before the inauguration. The thinking is that any form of stimulus would be an incremental positive for the economic outlook and, in turn, earnings. However, from my seat, the key thing to recognize here is that stocks remain in a sideways, range-bound phase that will likely need a fundamental trigger of some sort to be resolved. So, until said catalyst appears, traders may want to "ride the range" while longer-term investors are probably best suited to stay seated on the bull train – with their seatbelts tightly fastened, of course.

The Big-Picture Market Models

There is one modest change to report on the Primary Cycle board this week as our Fundamental Factors model slipped back into the neutral zone. However, with the rest of the board sporting a fairly bright shade of green, I believe that (a) the bulls deserve the benefit of any doubt here and (b) a healthy dose of patience may be needed in the coming weeks. But from my seat, it looks like investors should stay the course here.

Primary Cycle Models.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability.

Checking On The "Primary" Cycles

While I don't often make portfolio adjustments based on the long-term trends in the stock market (aka the "primary cycles"), I have found over the years that checking in on state of the cycles and the weekly/monthly charts helps to keep the big-picture in perspective.

Primary Stock Market Cycles.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability.

The Secular Market Cycle

Definition: A secular bull market is a period in which stock prices rise at an above-average rate for an extended period (think 5 years or longer) and suffer only relatively short intervening declines.

A secular bear market is an extended period of flat or declining stock prices. Secular bull or bear markets typically consist of multiple cyclical bull and bear markets.

Below is a monthly chart of the S&P 500 Index illustrating the current cycle, which we estimate began on March 9, 2009.

S&P 500 Monthly Chart.

The Cyclical Market Cycle

Definition: A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify.

A cyclical bear market requires a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days. Reversals of 30% in the Value Line Geometric Index also qualify.

Below is a weekly chart of the S&P 500 illustrating the current cycle, which we estimate began on March 24, 2020.

S&P 500 Weekly Chart.

Thought For The Day:

Choose a job you love, and you will never work a day in your life. 
-Confucius