Here’s Why Stocks Could Rally Through The End Of The Year
As many of you know, I’ve been expecting a pullback in the stock market.
Two weeks ago, I noted, “The chart indicates a 2.5% pullback is likely before we see the market rally sharply into the end of the year.”
The chart of the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) is shown below with important support levels. On the bottom of the chart, I’ve tracked my Profit Amplifier Momentum (PAM) indicator. The pullback, from high to low over the past two weeks, was 2.9%.
As you can see from the bars in the bottom segment, PAM is already showing signs of bottoming. That signal tells me that our pullback — while short — is likely already over.
Now, there could still be additional weakness, but it looks like we’re set up for an end-of-year rally. If you recall, I have given several reasons for this over the past few weeks.
One is that we are likely to see fund managers shift their portfolio allocations as we head into the new year — from bonds into stocks. As I said in this piece:
Because bonds have climbed so much over the past 12 months, they now likely account for a much larger proportion of holdings than when they started the year. That means, even if the outlook for bonds were bullish, professional fund managers would still have to dump a portion of their holdings.
Another reason, as I mentioned in this piece: Throughout history, most bull markets end in a blow off, which is a race to new highs with prices growing faster than the fundamentals. The blow off usually comes just as a recession is beginning. Right now, we are at the point where a blow off is likely.
The weekly chart shows that PAM has already turned bullish, with the bearish red bars subtly turning into bullish green bars around late November.
Despite the strong message we’re getting from the chart patterns, this week’s Federal Reserve meeting had the potential to unravel things.
Fortunately, we managed to get past Wednesday with no major surprises. As expected, the Fed did not change interest rates or its economic growth projections. Had Powell surprised us all with large changes to bond buying programs or a less-rosy economic outlook, it could have sent stock prices lower.
The biggest risk this week was Chairman Powell’s press conference. The good news here is that Powell understood that risk as much as anyone. As we’ve seen in the past, Powell is continuing to watch his words closely when he speaks, limiting downside risks.
Action To Take
This is important because it shows stock market investors that the risks they face are hidden for now. There is no reason to be bearish other than the fact that the bull market is more than 10 years old.
Bull markets don’t die of old age. They die when recessions occur or global financial crises develop.
For now, we should remain bullish. The weekly chart of PAM is designed to minimize short-term trades, and the current signal is just four weeks old. Until weekly PAM weakens, I am preparing for a strong rally.
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