The Biggest Risk To Economic Growth And Stock Market. Is Buying Dip Still Good Strategy?

S&P 500 and Nasdaq again trade to fresh new all-time record highs. The S&P 500 has now set 54 record closing highs so far in 2021 and is up +23%. Only 1964 and 1995 saw more than 50 new highs before August was over. In fact, the all-time record for new highs in one year is 77, set in 1995. Trend watchers note that 2021 is only the 11th time since 1928 that the S&P 500 has rallied +20% or more during the first 8 months of the year. In all but the two big market crash years of 1929 and 1987, the S&P 500 managed to hold a solid double-digit gain into year end, according to Bank of America research.

Bears vs bulls

Bears, however, are quick to point out that the S&P 500 hasn’t had a pullback of at least -5% or more during the entire climb higher this year, something that generally happens about three times a year. Typically, corrections of -5% to -10% are considered healthy. Bears of course believe stocks are wildly overvalued due in large part to the Federal Reserve’s monetary supports and “easy money”. Once the Fed starts reducing its asset purchases and lifting interest rates, bears believe investors will take a more “risk off” attitude and the bull rally in stock markets will correct to some degree.

Overall, bulls seem comfortable with the Fed beginning its asset purchase “taper” later this year and that is partially due to Fed Chair Jerome Powell’s insistence that the economy “still has much ground to cover” before rate hikes are on the table. Bulls are also anticipating a second shot at a “reopening boom” after the current wave of coronavirus has passed. Remember, this wave cut short the Covid-free summer spending surge that everyone had been anticipating so bulls believe this pent-up demand is going to be spent in the quarters ahead.

What to watch?

The biggest risk to economic growth right now is not on the demand side but rather on the supply side as shortages for everything across the board are limiting the amount of goods and services available. Demand amid the summer Covid surge has cooled a bit, which may be a good thing in the long run as it’s given some manufacturers a minute to catch up. And again, bulls believe this is creating just another layer of pent up demand that consumers will satisfy down the road.

Turning to next week, remember that U.S. stock, bond, and commodity markets are closed on Monday, September 6 for the Labor Day holiday. The short week will also be light on data with just the Fed’s Beige Book and July Consumer Credit on Wednesday, and the Producer Price Index on Friday. Next weeks earnings will included Caseys General Store, Lululemon, GameStop, Oracle, Z-Scaler, Academy Sports, and Kroger to name a few.

SP500 analysis

Sp500 rallied despite weak NFP. There is only one reason for such reaction – the Federal Reserve still cannot move to tighten monetary policy. However, the Cycles forecast the best buying dip opportunity in October if other conditions will be there. We certainly can’t judge now if it is going to be conformed by other tools.

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We have bearish ADL divergence on a daily chart and potentially it will play well and create a buying opportunity in October. However, I have to say there is still good accumulation in this market. So, I believe if this market gives a sell signal in September, traders should cash out their positions quite quickly. We are in a strong bull trend and so far all fundamentals still support the stock market.