Summer 2018: The Market Melt Up Returns
Summer is here! After a long, volatile winter, it’s finally time to fire up the grill and hit the beach.
But, we’re not putting our trades on autopilot here at Rude HQ. Instead, we’re breaking down some of our big 2018 predictions during this short trading week. We’re going to review exactly how we saw this year shaping up all the way back in December. You’ll see what went exactly as planned, which wild guesses missed the mark and where our trading plan will go from here.
Our first swing at a market forecast for 2018 started with stocks.
Back in December, most serious analysts said 2018 would be a decent year for equities. The predictions we read pegged the S&P’s 2018 performance between 5% – 8%. Another “average” year for averages…
But that’s not what I was seeing.
Sure, I thought the major averages would finish in the green. But I didn’t believe we would see the S&P, Dow Jones Industrial Average and Nasdaq Composite churn out wimpy, single-digit gains. In fact, I saw stocks finishing much, much higher.
My first big prediction for 2018 was that the S&P 500 would finish higher by 20% or more, edging out this year’s returns to post an incredible two-year run approaching gains of 50%.
Crazy, right? There’s no way the market will post strong gains by the end of the year after enduring a sharp correction during the first quarter…
Not so fast. Even when we factor in the February correction and subsequent chop, there are a couple of key facts that suggest we are still in the early phases of a melt-up move.
First, it’s important to note that prior to breaking out to new highs in late 2016, the S&P 500 endured a choppy, two-year “stealth bear” market that featured major, corrective selloffs in speculative names such as biotech and small-cap stocks.
Here’s the chart I shared back in December:
The financial media loves to talk about how the major averages have enjoyed a massive bull run since the 2009 market bottom. One glance at this chart proves this is not the case.
Stocks have not shot higher in a straight line for nine straight years. In fact, stocks have endured multiple pullbacks and corrections since 2009, including a drop of more than 19% in the S&P 500 during the summer of 2011 (which apparently doesn’t count as an official correction since it missed dipping 20% by the skin of its teeth).
Furthermore, it’s important to measure the beginning of bull markets from where the averages first break out to new all-time high. That didn’t happen until 2013 for the S&P. So much for the theory that the current secular bull market is long in the tooth.
While I noted late last year that a repeat of 2017’s performance wouldn’t be an unprecedented market event, I did note a catch to my market melt-up prediction…
It wouldn’t be an easy ride.
At the time, the S&P 500 hadn’t experienced a 5% pullback in more than 13 months. So I added a caveat to my melt-up prediction: I said the market would see at least two pullbacks of 5% or more.
“Each of these pullbacks will bring out new crash predictions, convincing some investors to cash out before the next leg higher. We might even see some short-term panic,” I noted. “But the market will eventually snap back and resume its ascent. The wall of worry will get a little steeper and the sold-out bulls will pile back into stocks.”
That’s exactly what we’re seeing right now. Stocks are starting to firm up after months of choppy action following a sharp correction. If this comeback move continues, new highs will be in play soon.
We’ll have to wait and see if the S&P can launch higher during the second half of the year. But remember, I can’t control the stock market. No one can. I won’t fight the tape if I’m wrong. Instead, I’ll change my outlook. That’s the only way to survive as a trader.