For those that have been sitting in cash and have missed the 25% rise in the S&P 500 since November 2012, the recent 5.3% correction likely represents the best buying opportunity you’re going to get. The index bounced perfectly off its uptrend line and the outlook for US equities remains bullish.
As the chart below shows, the recent correction which began on 22 May brought the S&P 500 index down to the blue uptrend line which has provided support since November last year. The recent bounce also coincides with the 50-day moving average.
An 8 month (daily) chart of the S&P 500 index (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
Also shown on the chart is the 14-dat RSI (relative strength index) – a technical momentum indicator that indicates overbought and oversold conditions. The RSI was clearly overbought as the market topped in May, however it is now back in neutral territory.
The outlook for US equities
The intermediate-term outlook for US equities remains bullish. We are now in the process of transitioning from a falling rising interest rate environment to a rising one. Going forward this will mean losses for those holding bonds (something we are already beginning to see) which is certain to trigger a rotation out of bonds and into equities.
Another factor the will help to drive stocks higher is inflation. Sooner or later money velocity will begin to pick up and when it does we are likely to experience a period of persistently high inflation.
The companies that look most attractive are still those with solid business models, decent cash flow and a history of increasing their dividends.
Those looking to protect their downside should the recent correction turn into something more severe, can do so by placing a stop loss order (either actual or mental) just below the blue uptrend line, or perhaps the psychologically significant 1,600 level.