Forget Washington, Buy on Weakness

“Everyone’s waiting for a collapse. That kind of pessimism is the perfect foundation for a new bull market.”

Stocks have been feeling a bit weak lately. But big picture, the S&P 500 is only down 2% from the recent all-time high, falling 35 points to 1,690 from 1.725 in mid September.

That blast of relative weakness is being driven by more uncertainty out of Washington. We’re not going into the details here, but the fact that the S&P 500 is only down 2% in the face of more adversity is pretty solid.

It also means the bull market is intact. Take a look at the bullish uptrend below.

S&P 500

Here’s what everyone needs to understand.

The Fed isn’t going to let the market or economy fall apart. There are a lot of people looking for a collapse. Or even a big pullback. But pullbacks and bear markets are rare. Stocks spend a lot more time going up than going down. Since 1950, there have only been 9 bear markets. And 2 of them have been in the last 12 years.

In fact, looking at this chart of bear markets below, it looks like stocks are now in position, after trading sideways for 12 years, to charge another leg higher.

Bear Markets 1950-Present

A potential new bull market. Because think about it, everyone is crazy bearish right now. Everyone’s waiting for a collapse. That kind of pessimism is the perfect foundation for a new bull market.

And what about interest rates? If we see big capital outflows from bonds and inflation takes hold on Fed printing, those are another two very bullish things supporting higher stock prices.

The Fed saw how quickly interest rates jumped in May when they first hinted at tapering QE. It’s important to understand that spike in interest rates scared the hell out of the Fed. That was their worst nightmare come true. The Fed is now going out of its way to reassure the market it will keep playing its part and juicing the market with liquidity. And that is a very big signal to the market to keep buying.

Looking forward, I’m using dips as a chance to buy. If Washington announces a deal, the market should turn quickly and charge higher. That’s why I am buying into weakness. Because by the time that news hits the Street, it will be too late to jump on board.

And then after that, I’m looking for a rally into the end of the year. The bull market is in play and I’m not going to fight it.

Mike

This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.