By Graham Summers, MBA
Stocks are due for a pullback here.
The S&P 500 is ~5% above its 50-Day Moving Average. Historically, this degree of extension above the primary trend has marked a temporary top. It doesn’t mean that stocks will collapse, rather is suggests the upside is limited and consolidation/ correction is the high probability scenario.
The question now is how deep the correction will be…
For that analysis we turn to bonds and the Fed.
The yield on the 2-Year U.S. Treasury has declined from 5.25% to 4.2% where it is now. This decline has been driven by the Fed pivot, in that the Fed will no longer be raising rates, but instead will begin cutting them in the near future.
This will be a boon for stocks as this declining yield means:
1) Stocks will be priced at a higher future Earnings Per Share (EPS) multiple.
2) Money will begin to flow out of bonds and money market accounts into stocks as yields have peaked.
All of the above suggests that any and all dips in stocks will be relatively shallow. Put simply the coming decline is an opportunity to “buy the dip” in a new bull market.
In terms of specific price points, the S&P 500 has major support at 4,700. I would be very surprised to see the market drop much below that level. The S&P 500 might decline into the upper 4,600s to “run the stops” for stock bulls, but a drop below 4,680 is unlikely.
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