Get ready to blow out the candles and put on your party hat: The S&P 500 is set to celebrate its sixth birthday this month. Does this mean caveat emptor? By historical standards, the current bull cycle in stocks is getting old. Only 3 other bull markets out of 12 since World War II have lasted this long, according to S&P Capital IQ.
While the phrase "this time it's different" may set off warning bells for some, abnormal global monetary policy conditions in recent years really do create an unprecedented situation, according to JJ Kinahan, chief strategist at TD Ameritrade. Central banks around the globe continue to slash interest rates this year. By one count, there have been 18 different rate cuts since the start of 2015.
The current bull market in U.S. equities "is getting long in the tooth. But what is different about this bull market from others is quantitative easing. This is an abnormal situation, which means it might have an abnormal outcome," said Kinahan.
Although the Federal Reserve has wrapped up its bond-buying program known as quantitative easing, the Bank of Japan and the European Central Bank still have the floodgates of liquidity wide open amid efforts to battle back against sluggish growth and deflationary threats. What could this mean for investors and their portfolios?
Get Ready for More Zigs and Zags
There is "so much cash out there because of the monetary policy conditions. The scale of the moves will be bigger," said Kinahan. "As you think about us going higher, rather than straight up, we may get a really rocky road."
Stock market action in the first few months of the year may be just a preview of what's ahead. "Look at the January sell-off and the February recovery. We may see three to four weeks where the market gets smashed and then three to four weeks where it comes back," said Kinahan.
"Volatility may return to more historical levels. The past few years it has been at 15 or below. This year I think we will see the VIX around 19–20," said Kinahan. Readings at 20 or higher generally signal worry or fear among stock investors. The CBOE Volatility Index (VIX) closed at 13.64 on Friday.
Looking around the globe, international conditions and concerns continue to trip up the outlook for global economic growth. The U.S. economy remains a bright spot in the global economy. "The U.S. is the little engine that could. It is the economy that is bringing everyone else higher," said Kinahan.
Nevertheless, the U.S. is not an island. "We are one global economy; we are never separate from the financial problems of anyone. If one economy struggles, the entire world could struggle," said Kinahan.
More Volatility Could Mean Opportunity
For investors, "you have to be much quicker and agile. Everyone has long-term investments, but think about getting in partially. So, if there is a sell-off, that becomes a buying opportunity, rather than a time of panic, " said Kinahan. Increased levels of volatility "will give you the opportunity to be in and out," he said.
Investors looking for tools to help quantify potential movement in individual stocks can utilize the Trade Architect "Probability Analysis" study (see figure 1). "It shows the expected one standard deviation move over time," (meaning, within a nearly 68% probability) explained Kinahan. "It can give you a level of where you might want to place a bid on the downside or an offer on the upside."
Other simple technical tools that can offer clues for investors include the 200-day and 50-day moving averages. "Those are levels to think of as support. They could identify places to put bids, or stop orders just below them if you want to get out," said Kinahan.
Get Your MA On
Learn more about using moving averages in our recent Charting Basics article: