The S&P 500 has been experiencing an exceptional run in the past few months, with a remarkable 25% increase in the last five months alone. Such a substantial gain is rarely seen in the history of the stock market, with only seven other instances since 1950 surpassing this level of growth. While many experts are predicting an imminent pullback due to the extended winning streak, it is essential to consider the power of momentum in driving the market forward.
Challenges to Predicting Pullbacks
Despite the widespread belief that a pullback is inevitable, the momentum of the S&P 500 remains strong, as evidenced by its trading position significantly above the 200-day moving average. Todd Sohn from Strategas emphasizes that while mean reversion is a potential threat, historical data suggests that the market tends to continue its upward trend even after significant gains. Therefore, the assumption that a pullback is imminent may not be entirely accurate, and investors should consider the potential for further positive returns in the coming months.
Contrary to popular belief, the market's recent success cannot be solely attributed to big-cap tech companies. While the technology sector has played a significant role in driving the market higher, other sectors, such as communication services, energy, financials, and industrials, have also seen substantial growth. Additionally, market breadth has been expanding, with approximately 70% of the S&P 500 companies experiencing positive gains this year. This increase in overall market strength indicates a broader foundation for the current market advance.
The advancing/declining ratio of the S&P 500 has been overwhelmingly positive since the middle of January, indicating a consistent upward trend in stock performance. This trend is further supported by the Russell 1000 index, which serves as a broader indicator of market health. Market watcher Ned Davis emphasizes the importance of market breadth in sustaining a bull market, as widespread strength across various sectors is crucial for long-term sustainability. In light of the persistent market strength witnessed in recent months, it is evident that the current bull market is still robust and likely to continue its upward trajectory.
Implications for Investors
While the prospect of a market pullback following significant gains may seem logical, attempting to time such declines can be a challenging and risky endeavor. Instead of trying to predict short-term market movements, investors may find it more profitable to stay invested in the market and benefit from the long-term upward trend. Chief investment strategist Alec Young advises against timing the market and recommends staying invested to capitalize on the continued market strength. By focusing on broader market trends and maintaining a long-term perspective, investors can navigate the uncertainties of the market with greater confidence and potentially achieve more significant gains.