Market History

Using the past to rationally predict the future.

How long should you wait before buying the S&P 500?

With the S&P 500 falling right now, it seems like the U.S. stock market is in a correction. Both stocks and bond yields are falling because investors are realizing that Trump’s pro-growth policies are mostly dead in the water.

Keep in mind that our models do not predict a big correction. This means that at most, the S&P will retest the beginning of the Trump rally at 2083. It should not fall below this level by any significant amount.

Right now we are still 100% long UPRO, the 3x ETF for the S&P 500. We invest purely based on our models, and our models do not forecast a big correction right now. This is still a bull market.

But if you do have cash sitting on the sidelines, how long should you wait before you starting buying stocks? Here are some things to consider when deciding to buy…

Where the 200 day moving average will be

The 200 day moving average (200sma) has historically been a great support for small corrections. Although it stands at 2228 right now, it will be at 2235 by the end of next week.

A 7% decline from the S&P’s top on March 1 brings the S&P down to 2232. 7% is very standard for a small correction.

Hence, 2235ishfor the S&P is ideally the best price to start buying U.S. stocks if you’re investing in the index.

The overshoot

Of course many small corrections will overshoot. It just so happens that 2080 is slightly above the target for a big correction as defined by my model. 2080 is also the beginning of the whole “Trump reflation” trade that saw stocks soar since November 2016.

As a worse case scenario, the S&P will give back all its gains since the Trump reflation trade began. But it shouldn’t really fall below 2080 because there are no signs of a big correction.

Alternative approaches to buying

Instead of waiting for the S&P to fall to 2232 (7% correction) before buying, here’s another way to buy.

Right now, political uncertainty is holding the S&P down. Congress is on recess and will get back to work in the last week of April. In addition, there will be a budget fight and potential government shutdown in the beginning of May. Consider buying stocks once the budget fight is over. Perhaps there will be signs that Trump is getting closer to passing some of his pro-growth policies in early May. Although most of his policies are dead in the water, he has 2 weeks to work out some sort of agreement with Republicans (and hopefully a few Democrats).

But there is a problem with timing your buying/selling based on events. History shows that a lot of the S&P’s short term movements are random. There is no correlation between events and market tops/bottoms. Sometimes the market will bottom before bullish events come out, and sometimes the market will continue to fall AFTER the bullish events come out.

That’s why we think buying at 7% is the best idea.

Of course, perhaps the S&P won’t fall 6-7%. Perhaps it will only fall 4-5%. Perhaps the bottom is already in. Who knows. We don’t really care because we are already fully invested and don’t foresee a big correction. This is still a bull market.

What things should you ignore right now

The media likes to hype everything up. Apparently everything can impact the market. This is simply not true. Most things in this world have very little to no impact on the S&P in the medium term.

  1. The North Korea situation. History from 1990-present shows that the stock market does not care about “bearish” news from North Korea. Perhaps the market will fall if bad news comes out of North Korea, but that is really just a 50-50 bet. We don’t base our investment decision on 50-50 bets.
  2. Earnings season is coming up next week. The banks release their earnings first and then tech stocks release theirs after that. Historically, the broad stock index has gone up 60% of the time during earnings season and gone down 40% of the time. These are not great odds. In addition, there is no correlation between stock price movements during earnings season and how good the earnings reports are. For example, Q2 2016 earnings season in July 2016 was great. Companies beat expectations across the board and earnings grew significantly, but the S&P was completely flat. It only went up in August 2016 after earnings season was over.
  3. The French election. Some people say that Le Pen (far right candidate, like Trump) fears are weighing down on the S&P. This is probably not true. The odds of Le Pen winning are minuscule.

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