Have you ever been in a situation where you are unsure of what to do? You go back and forth, back and forth, until something finally pops into your mind that allows you to make a decision. The process can be mentally and emotionally draining.
Over the past year, many investors have felt the same way about the stock market. The market seems to trend back and forth with no clear direction. Just when you think it is going to break out and a new bull market will begin, it pulls back again. It has been an emotionally trying time for investors.
In our February 2023 update, Beacon Wealth Consultants’ Chief Investment Officer Hillary Sunderland, CFA®, CKA® discusses this indecisive market, some key technical levels in the market and what we are watching for in terms of a path forward for this market.
Watch our video to learn more!
If you have any questions about your financial situation, please reach out to your wealth advisor and we would be glad to address them for you. Thank you for being a valued client of ours.
Full transcript below.
Transcript
Hi, my name is Hillary Sunderland and I’m the Chief Investment Officer of Beacon Wealth Consultants and LightPoint Portfolios. This is your February, 2023 market update.
Have you ever been in a situation where you are unsure of what to do? You go back and forth, back and forth until something finally pops into your mind that allows you to make a decision. The process can be mentally and emotionally draining, and over the past year, many investors have felt the same way about the stock market.
The market seems to trend back and forth with no clear direction, and just when you think it’s going to break out in a new bull market will begin, pulls back again. It’s been an emotionally trying time for investors.
If the stock market could talk, I think it would echo the words of President George H.W. Bush who once said, “people say indecisive, but I don’t know about that.”
Overall, the market is looking for some clarity and I thought it would be helpful to take some time today to show you some key technical levels in the market and what we are watching for in terms of a path forward for this market.
Before we begin, let’s identify a few terms. When we talk about the market moving sideways, that means the market is moving between two levels, a support area and a resistance area.
In a down trend, prices fall because there’s an excess of supply over demand. The lower prices go the more, attractive prices become to those waiting on the sidelines to buy. At some level, demand meets supply and prices stop falling. This is called support.
Resistance is the opposite of support. In an uptrend, prices rise because there is an excess of demand over supply. As prices move higher, there will come a point when price targets are met or when buyers become reluctant to buy more shares at that price. So the move higher stalls, this is called resistance.
These support and resistance lines can be identified on charts using trend lines or moving averages, and this is something that the investment team assesses regularly in the management of the LightPoint Portfolios. Here is an example of a resistance level on the iShares Russell 2000 ETF, which is an ETF that tracks domestic small cap stocks.
You can see here that we had a really nice rally in January of this year only to have it stall at its resistance level and pull back during the month of February. Now, this is a very natural occurrence in the market that happens quite often. When you hit up against that level, investors are reluctant to keep buying, and so it is natural to see some sort of pullback. The market will usually waffle between support and resistance until it can take some decisive action regarding forward-looking expectations for the market.
If we can get a nice breakout above this level for the Russell 2000, that will be a very encouraging sign for the stock market. And interestingly, once you do get above the resistance level, that resistance level usually becomes the new support level for any downturns in the future.
Let’s look at another part of the market. Here’s a chart of the S&P 500 index, which measures the performance of publicly traded domestic large cap companies. The S&P 500 began the year with a strong advance of almost 10% by the beginning of February, but similar to small cap stocks around Valentine’s Day, the market started to reverse its course as bond yields rose during the last few weeks of February.
Yields on bonds moved higher because some of the economic numbers were good. The labor market continues to be strong with falling jobless claims and a very low unemployment rate, and the tight labor market has been fueling the concern that wages will continue to rise and the upward pressure on wages can be inflationary.
Because of this, the Federal Reserve indicated that they may have to keep rates higher for longer than the markets we’re anticipating. The rise in bond yields led to a pullback in the equity markets, and now we are testing a key support level called the 200 day moving average, which is shown as the downward sloping red line here.
The 200 day moving average represents the average price of the market over the past 200 days, and it gives us a sense of whether the overall trend of the market is up or down or whether the market is playing offense or defense. We’re watching this area very closely because you are more likely to experience a sustained advance in the market when the market is trading above its 200 day moving average or while the playing offense.
I always think a good analogy for this is football. Can you score a touchdown while the defense is on the field? Sure, but it’s way easier to score a touchdown when your offense has the ball.
So we are looking for this support level to hold if it does, and we start to see a series of what we call higher highs and higher lows, and especially if we see a breakout above the S&P 500’s resistance level, which is around 4180 on the S&P 500, that will give us a confidence that the market has gained its footing once again, that the market is once again on offense.
So what is needed for that to occur? I think the best catalyst would be data that gives us more certainty around the outlook for interest rates. While I would say that the majority of interest rate increases are already priced into the markets, we don’t know for how long the Fed intends to keep interest rates this high, and that has put the markets on edge.
So this sideways phase could go on for at least the next few weeks as the next Federal Reserve interest rate decision isn’t till March 22nd, and in the stock market just a few weeks can feel like an eternity to investors.
In the meantime, how do you as an investor cope with a sideways market? We recognize that it has been a frustrating season for investors, as you can see by this chart of the S&P 500 and the yellow line I drew on the chart there. As of March 1st, 2023, the S&P 500 index is at approximately the same level it was back in April of 2022, and there have been a lot of starts and stops along the way.
However, there are some good things about a sideways market, so keep this in mind. First is that we have seen a dramatic reduction in volatility, and this gives investors time to reevaluate investments and make portfolio adjustments.
For those of you making regular contributions to your investment accounts, a sideways market is a good thing for you because you have the chance of obtaining a better long-term average price point.
And also remember that while large cap domestic socks have been moving sideways for the better part of a year, we are global investors and not every stock or bond market that we invest in is stuck in a training range. Some areas of the market are more attractively priced than they have been for the better part of a decade.
For example, within the bond market yields for investment grade bonds or in the four and a half to 6% range, and in other bond asset classes such as floating rate loans, yields are hovering between 9% and 11%. So by staying invested and remaining patient, you are likely to be rewarded as this dividend income starts to come in.
Remember that when you invest in the market, you are investing in businesses and you want those businesses to grow and to flourish, to sell more of its products and to serve more of its customers. In order to be good stewards of the assets and trust to our care, we must be patient with our capital. Thank you for your continued confidence and please reach out to us with any questions that you may have.
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