Today I was having a rather spirited discussion with a friend about the direction of the stock market. He was of the opinion that the stock market could be in trouble now because earnings growth could slow in Q1 of 2019 from a white hot 27% this year on the S&P 500 to 10% next year.
Three or four articles appeared today with this theme. It is ironic how out of nowhere such articles appear. Clearly, such an outcome would be a negative change in the rate of earnings, if this were to happen.
My counter to this thought process is that may be important in April when we start to get Q1 earnings but not here and not now. Why? Very simple. Seasonal trends that are very hard to go against are now at work between now and year end.
Specifically, when looking at the up and down cycle to stocks that I have followed since the Q4 of 2012 it could be a stretch. The idea of tracking cycles is really simple, track moves of at least several percent from their absolute high to low and then their low to high. Rinse and repeat over and over again.
The first table is of down moves since 2012. There have been 33 down moves since Q4 of 2012. So far in 2018 there have been 6 such moves. The current down move which is place right now but could be lower is -6.91% since September 20th to October 11th. In total, for 2018 the pullbacks/corrections have totaled -34.12%.
The average yearly pullback from 2013 through 2018 is -26.60%. The median is -27.25%. So this year is a little worse than the average or median. As such, enough damage has been done. It is time for a rally.
In the Q4 of 2013 onward, the worst move on the upside was 8.95% and the best that carried into 2018 was 18.44%. So the average move in Q4 is 12.49% and the median move was 11.59%. Not too shabby and couple this with a few option trades and you might be able to coin some real money.
The current sentiment is what I call “Eeyore Syndrome” where everyone is feeling bad and to quote Eeyore, “The sky has fallen. Always knew it would.” Using data, allows one to avoid being suckered into this syndrome.
Well, just remember it is always darkest before the dawn and to not have a positive outlook here makes no sense at all despite mid terms, tariff wars, crazy presidents and despots, terrorists and a potential peak in earnings. Sometimes the easy trades that makes the most sense are often the hardest trade to make.
Who knows what will happen in 2019 but for now I like the next up cycle a great deal!