I’m Expecting A Pullback. Here’s What You Need To Know…

The Federal Reserve met last Wednesday. As usual, Chairman Jerome Powell held a press conference at its conclusion. As the conference began at 2:30 Eastern time, the Dow Jones Industrial Average was up more than 150 points. By the time he was done, the Dow was up just 20 points.

Powell didn’t really say anything. He said the global economy appears to be stabilizing. He also noted that there are a lot of things that could go wrong including coronavirus, pressure on wages (since unemployment is low), and the fact that the repo market remains stressed.

None of those worries are new, and the news on the global economy is a change for the better.

Historical precedents for the coronavirus story include China’s struggle with SARS in 2003. Chinese GDP increased 12.9% in 2003, up from 9.8% in 2002, and less than 17.8% in 2004.

In fact, it does look like the Chinese economy, as a whole, won’t suffer much from the coronavirus. Economists with Wells Fargo analyzed the potential impact and lowered their growth forecast for China to 5.9% from 6.0%. That’s not a large concern for the rest of the world.

Their analysis implies there will be short-term disruptions but no significant long-term impact. Some industries, like air travel and tourism, will see significant short-term impacts. But they should recover, as long as the virus is contained.

Why I’m Still Expecting A Pullback

Despite the fact that there’s nothing in the recent news that should keep us awake at night worrying, there is still a reason to expect a selloff in the stock market. Prices simply moved up too fast.

The chart below shows the recent rally in the S&P 500.

From its October low to the recent high, the S&P 500 advanced more than 16% in 16 weeks. The chart shows the rally lasted 75 trading days, which is about 16 weeks. That’s about 1% a week for four months — and that’s simply not sustainable. We should expect a pullback. But, not to worry, as that could set up further gains.

For now, I’m expecting a pullback of 5%-8% based on technicals. That would retrace about half of the “up” move and coincide with expected support near 3,100.

A drop of more than 100 points in the S&P 500 will bring the bears out. I will certainly be watching to see how the market reacts. But, like Chairman Powell, I don’t see significant problems on the horizon.

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That said, I’m always looking for ways to gain an edge on the market. And that’s why I plan to use my new MS35 system even more in 2020…

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(Related: Here’s My 2020 Outlook For Cannabis Stocks)

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