The investment world blamed coronavirus for the recent mini-slide in stocks. But there's a better explanation.
The rubber band was stretched to its limit in the U.S. market...
The S&P 500 rallied 11% above its 200-day moving average (200-DMA) last month. It was the first time the market had been so extended since January 2018.
In the short term, that was a sure sign that stocks would snap back... And they did. The S&P 500 fell 3% over two weeks. But stock prices have come roaring back up. And there's good reason to expect that to continue... with solid gains in 2020.
That's because buying after an extended move like we saw last month has historically led to double-digit gains over the following year.
It's just one more reason to expect a Melt Up in U.S. stocks.
Let me explain...
If you want to know where stocks are headed, you need to understand the trend.
Moving averages are an easy way to track the overall trend of an investment. If the current price is above its moving average, an uptrend is in place. And if the price is below the moving average, the market is in a downtrend.
The S&P 500 had been steadily above its 200-DMA since June. And after the recent run-up, it hit its highest level above this moving average in years.
Again, the index was as much as 11% above its 200-DMA last month. Check it out...
The S&P 500 has made a sweeping move higher since the end of 2018. And after the recent jump since October, the index moved well above its 200-DMA.
This kind of separation has happened roughly 10% of the time going back to 1990. And again, it isn't a reason to panic.
We've already seen a small fall in stocks thanks to this overextended move. But history says the picture looks bright over the next year. Check out the table below...
It might feel wrong to buy U.S. stocks after such an extended rally... But history says it's a good idea.
A typical annual return for the S&P 500 is 7.7% going back to 1990. But buying after a situation like today's crushes that buy-and-hold return.
Similar cases have led to 2% gains in three months, 5% gains in six months, and an impressive 13% gain over the next year.
So yes... the recent uptrend is stretched. It has already caused a small pullback in stocks. And that could happen again in the coming weeks. But looking out over the next year, history says we have major upside potential.
This plays perfectly into the Melt Up scenario my boss Steve Sjuggerud has been writing about. We could easily see double-digit gains in stocks this year... and potentially even more.
That means the wisest advice is to stay long stocks now.
Good investing,
Chris Igou
P.S. Steve's so sure of his Melt Up thesis that he hosted a massive Melt Up event last night. He gave a full update on what he expects in 2020, so I hope you tuned in. But if not, you can still catch a replay for a short time. He shared which types of stocks will see the biggest gains... and even how to know when the Melt Up will end. So believe me, you don't want to miss it. Check it out right here.
Further Reading
"Still not sold on my Melt Up thesis?" Steve asks. The last year was amazing for stocks. And if you're still on the sidelines, you'll likely miss out on huge outperformance in this historically hot sector... Read more here: Definitive Proof That the Melt Up Is Finally Here.
"You can always come up with an excuse to NOT put your money to work," Steve says. But if you want to participate in this Melt Up, you'll need to overcome that fear. And once you do, you'll need a plan to make the best of it... Get the full story here: How to Start Out in Stocks – Here at Record Highs.
U.S. stocks are likely to keep melting up over the next year. And a new transition to cashless payments will help make this company a big winner as the uptrend continues...
NEW HIGHS IN A STEADY, 'BORING' COMPANY
Today's chart highlights how "boring" businesses can be a boon to your portfolio...
Regular readers know that businesses don't need to ride a flashy new trend to thrive. All they need is a safe, steady business model. It may not be exciting... but it works. And today's company is a leader in a boring sector that's bringing in profits...
Cintas (CTAS) is a $30 billion provider of uniforms. It also offers logo mats, and even services such as industrial carpet and tile cleaning. With more than 400 facilities in North America, Cintas works with more than 1 million businesses. And it may not be exciting... but providing uniforms and cleaning services is paying off. Cintas recently reported solid quarterly results, with sales up 7% year over year to $1.8 billion.
As you can see, CTAS shares are in a long-term uptrend, up nearly 280% including dividends over the past five years. Shares recently hit a fresh all-time high. As Cintas continues to provide uniforms and work supplies to businesses across America, that uptrend should continue...
