For all the bad things supposedly raining down on Wall Street, it’s shaping up to be a big year for stock bulls who simply sat tight and refused the temptation to outsmart the market.
In fact, buying and holding equities has trounced 22 technical strategies used by traders to navigate their ups and downs. The sit-still plan has paid off handsomely after the S&P 500 touched its 2023 low on Jan 5 only to climb steadily to its highest point on Friday.
In a market riven with Federal Reserve uncertainty, economic anxiety and a host of geopolitical ructions, stocks have reacted with uncanny calm. Going by the distance between the extremes in the S&P 500, this year has a shot of seeing the smallest move since 2017.
While charting tools are rarely used in isolation, their lousy performance highlights the pain for anyone who heeded selling signals, whether driven by technical or fundamental factors. Amid the Fed’s most aggressive tightening cycle in decades, three quarters of profit contractions and a collapse in multiple regional banks, those who bailed from the market have missed out on a US$7 trillion stock rally.
“There was a lot of noise and a lot of reasons to be nervous this past year,” said Dylan Kremer, chief investment officer at Certuity. “But if you’re a long-term investor, sometimes the hardest thing to do is sit on your hands.”
Up 0.2% over five days, the S&P 500 rose for the sixth straight week, the longest advance since 2019. Over the stretch, the pace of gains slowed as the index approached 4,600, a level that thwarted its advance in July. The benchmark gauge ended the week slightly above that threshold.
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From big money managers to equity strategists, many came into the year dreading a recession, only to find themselves scrambling to chase the share rally as the economy chugs along. Up 20%, the S&P 500 is more than 500 points ahead of the average year-end target that’s eyed by Wall Street prognosticators back in January.
Jamie Cox, managing partner at Harris Financial Group, witnessed first-hand the penalty of timing the market wrong. Back in October, when stocks were on route for the year’s biggest pullback amid a spike in bond yields, one client decided to get out against his advice.
“He probably sold everything in the early part of November,” Cox said. “And then, here three, four weeks later, 15% worse off, he just let it go.”
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Time Tested
Despite fresh evidence that staying invested is the ultimate time-tested strategy, caution is creeping back up. Hedge funds sold global stocks last week, according to data compiled by Morgan Stanley’s prime brokerage. Goldman Sachs Group Inc’s Scott Rubner advised clients to add protection against potential losses, while Bank of America Corp’s Michael Hartnett said equities will suffer in the first quarter.
The bearish case: Valuations look stretched. Corporate America is about to enter the earnings-related blackout on buybacks, depriving bulls of one big ally. While expectations on interest-rate cuts have bolstered shares of late, anxiety is also building that any easing on the sight of an economic downturn doesn’t bode well for risky assets.
And going by charting indicators, the market has run too far, too fast. The S&P 500’s 14-day relative strength index triggered a sell signal in November, the same month when an alarm was flagged by Bollinger Bands. This week, the moving average convergence/divergence indicator — better known as MACD - flashed red, too.
Yet for all that, hitting the exit button on chart warnings has not served investors well. One way of looking at this: Bloomberg tracks technical indicators and its back-testing model goes long the S&P 500 when an indicator signals a “buy” and holds it until a “sell” is generated. At that time, the index is sold, a short position is established and kept until a buy is triggered.
As things stand now, seven of the 22 chart-based trading models are losing money this year. All have done worse than the simple buy-and-hold strategy.
Another lesson comes from market momentum, showing investors that avoiding stocks for any period of time is risky in a year when pullbacks are followed by violent bounces. Take the S&P 500’s latest round trip. While the index fell into a 10% correction over three months through October, the subsequent recovery was three times faster. That means, missing out on any big up days is costly.
In fact, without the top five sessions of 2023, the index’s 20% gain shrinks to 9%. (Of course, if one is lucky to dodge the worst five, the return expands to 29%.)
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While the stock market retrenches from time to time, it has shown a persistent uptrend over the long haul, thanks to corporate America’s ability to expand earnings. Profits among S&P 500 firms returned to positive growth trajectory in the third quarter and are expected to accelerate next year, according to data compiled by Bloomberg Intelligence.
Against this favourable backdrop, calls are growing louder that the benchmark index will climb to a fresh record by the end of next year.
No wonder Cox at Harris finds himself spending more time convincing people to do nothing than actively trying to be smart.
“Timing the market is one of the most fun things you can try to do because it’s like a dopamine-type behavioural thing,” he said. “If you get it right once, you feel really, really good about yourself and you get it right a couple of times and you feel even more confident. Then you become overconfident, and you miss once, and you destroy all the good that you’ve done.”
