It’s a scary stock market, but opportunities may soon beckon

Are better times ahead for the stock market? It has been trial and terror for most investors who’ve been whipsawed by the market since the presidential election. After taking off on high hopes for President Donald Trump’s pro-growth agenda, stock prices have since reversed course as investors refocused on their own wits and investing fundamentals in a market that suddenly turned moody. 

Indeed, the Dow Jones industrials average and the S&P 500 index made a 50 percent retracement of their January to February surge, with the Nasdaq composite dong a 30 percent reversal. “The market has trended sideways to down since February, a consolidation that weeded out profit takers and nervous investors -- generally a positive sign,” said George Brooks, editor of Investors First Read investment newsletter.

Investors have now come to the conclusion that it won’t be easy for President Trump to follow through on his ambitious goals with Congress not showing much interest in supporting them. So they’ve returned to appraising stocks the old-fashioned way -- by digging into the market’s basic fundamentals and the economic outlook.

Could Mr. Trump’s promise for a massive stimulus, massive infrastructure spending and huge corporate tax cuts turn out to be just a mirage? “What the bulls need is an indication that Congress will begin to address tax reform in the fall as well as provide Wall Street with ideas about who gets the big spend, infrastructure or defense,” said Brooks. Right now, with geopolitical issues dominating the headlines, the military is likely to win out, he added.

Still, there’s a silver lining to what’s been happening, confusing as the situation may be. Some savvy analysts believe the market might be getting oversold, in which case great opportunities to buy stock favorites that have been unjustly dumped could be waiting.

Through April 13, only 30 percent of the 148 subindustries in the S&P Composite 1500 stock index were trading above their 10-week, or 50-day, moving averages, noted Sam Stovall, chief investment strategist at CFRA Market Advisor. “While this is certainly an indication of recent weakness, it may also be viewed as a source of near-term optimism, since it implies that the market may be oversold,” argued Stovall.

He also noted that in any given week since Dec. 31, 1995, 60 percent of the subindustries in the S&P 1500 traded above their 10-week moving average. And whenever S&P 1500 had 30 percent or fewer of its subindustries trading above their 10-week averages, the S&P 1500 outpaced its average for all periods over the coming three, six, and nine weeks. “Indeed, the S&P 1500 rose in price 1.5 percent, 2.7 percent and 3.5 percent during the subsequent three, six and nine weeks after touching 30 percent or lower,” Stovall pointed out.

And if you’re worried that the market may weaken further, you have more gains to look forward to, he added. That’s because whenever the percentage declined to 25 percent or less, the S&P 1500 improved during the following three, six and nine weeks, rising 1.7 percent, 3.2 percent and 4 percent, respectively, and posting higher frequencies of advance during all periods.

Stovall argues that investors can take heart in the S&P 500’s 3 percent decline since its March all-time high despite the recent elevation of Wall Street’s proverbial “wall of worry” from rising geopolitical tensions involving North Korea, Russia and Iran, and the falling optimism that a Trump tax reform bill will pass before the August Congress recess.

These are “signs of better times to come,” said Stovall. And if history can serve as a guide, he added, the market will likely bottom in short order and recover quickly after investors conclude that the U.S. economy isn’t headed toward recession.

But there’s one major caveat: All bets are off should President Trump lose his balance over the North Korean standoff.