3/1/2019 Weekly Update: Looking Back at Our Year End Letter
by Zach Marsh on Mar 1, 2019
S&P 500 +0.4%
10 Year Treasury -0.98%
Weekly Update: Looking Back at Our End of Year Letter
Driving to work this morning I reflected back on the weekly letter I wrote on 12/28 of last year. As a reminder for those who are frequent readers of our Update Letters, in that letter I posited (somewhat pollyannaishly) that 2019 may be a good year for the stock market. I illustrated the long-term cyclical nature of bull markets and argued that most bull cycles last upwards of 15-18 years, with large pullbacks scattered in between. Here is the link for those interested in re-reading it Weekly Update: 2019, A Good Year for Stocks?.
Since the time of that writing the S&P 500 has rallied nearly 13%, with many skeptics, including myself, wondering how long this rally will last. Currently, the S&P 500 is sitting at 2804, a level that market substantial resistance back in October and early December. It was at this level on December 3, when the marked turned south and heading into a steep 16% decline. Now that we are back at this crucial level it seems appropriate that we re-address the prospect for a rosy 2019.
I’ve long maintained that a market bounce was never in question, but rather the sustainability and magnitude of the bounce was highly uncertain. The mark of whether this 2-month rally is the real deal, or just an extended bear market rally, will be determined by how it responds to the next downturn. Sustainable bull market trends are characterized by a succession of higher lows and higher highs. This current move has yet to exhibit a meaningful pullback which would define a higher low than the one made in December.
On the flip side, down trends are characterized by a succession of lower lows and lower highs. Even after this impressive rally, until we successfully take out the 2815-2800 level in the S&P 500, we will not make a higher high and will still be stuck in a mid-cycle downturn. Therefore, until we see additional confirmation from the market, the verdict is still out on the durability of this rally.
Judging the nature of bounce back rallies from market slides can be difficult. A 13% rally, after a scary Autumn, can make us want to throw open the cellar doors just because the wind died down, while meanwhile, the tornado may be still approaching.
Thanks for reading,
Zach and Dave
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