"This time, it will be different."
This phrase is perhaps the most overused and dangerous phrase in the world of finance. It usually means to get ready for a repeat of the same old market pattern or occurrence.
As an example, I remember back during the dot-com boom, many investors believed the stock market was going to continue skyward forever. They pointed to things like the unlimited potential of the Internet, the new economic paradigm and a variety of other factors that supported their bullishness. Well, despite the raging bullish fever and the "new" reasons for why it would never end, we all know what happened. The dot-com bubble burst in the same fashion as all other speculative bubbles during human history.
This year, we have experienced a huge bull market. Many pundits are calling for the bullish move to end in a sharp downward correction. These bearish prognosticators note that stocks usually drop during the months of August through October. In addition, they say the stock market is overvalued, citing technical patterns like the "triple top" to support their opinion.
The bears have a case, historically and cyclically. But I am going to go out on a limb and say things are really different this time.
Based on my research, there will not be a sharp pullback this autumn in the U.S. stock market. The selling has already happened, and I expect upside for the rest of the year. While this upside may be lackluster, I am convinced any additional downside will be quickly bought, thus preventing any steep declines.
Here's why things are different this time:
|1. Monetary policy will remain accommodative for some time.|
| This year's rally has been driven by accommodative monetary policy. Every dip like the one we experienced this month has been triggered by fears that the Federal Reserve may be changing its stance.
Fed Chairman Ben Bernanke has warned that "the premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of long-term rates."
This makes it clear the Fed will likely continue with its quantitative easing bond purchases into next year. The recent drop in stock prices has put fear into the minds of the members of the Fed's Federal Open Market Committee, and I expect they will err on the side of caution with their rhetoric and action until at least the end of the year.
|2. P/E metrics don't indicate an overvaluation of the S&P 500 index.|
| Let's look at two common metrics.
The trailing price-to-earnings (P/E) ratio for the S&P 500 is currently 16.1, compared with a historical average of 19.3 since 1960. In addition, trailing price-to-earnings/growth (PEG) ratio has averaged 1.6 since 1960 -- but now stands at 1.3.
Neither of these metrics indicates the S&P has become overheated.
|3. The technical picture remains bullish.|
| Using the S&P 500 as a proxy for the overall technical health of the U.S. stock market reveals the bull move is far from over.
The cash index remains over 100 points above the upward sloping 200-day simple moving average, which is at 1,560. While the 50-day simple moving average has provided price support for 2013 and has prevented the most recent selling from becoming hazardous to the bullish case.
|4. Europe has turned the corner.|
| The European Central Bank has said it will do whatever it takes to prevent another economic crisis in the region.
This has led to waves of positive sentiment sweeping the eurozone, lifting stock prices and providing clear signs that Europe's economy has turned the corner. (I recently wrote about how to profit from this change.) We live in an economically connected world.
The continuing good news from Europe can only help to support the U.S. stock market.
|5. China's showing improvement.|
| China is the engine for the world's economic growth. Recent fears of a dramatic slowdown in the world's second-largest economy have been greatly exaggerated.
Despite slight signals of slowing, the economy remains stable and on track to hit the government's targeted 7.5% GDP growth rate this year.
These factors combine to paint a bullish picture throughout the end of 2013. While we may not see dramatic upside, a sharp decline is also unlikely. Things really are going to be "different this time."
Risks to Consider: No one knows the future, and anything can and does happen in the stock market. "Black swan"-type events could derail my projections for the continued bull market. Be sure to use stops and position size properly.
Action to Take --> This is not the time to dump stocks on the advice of bearish pundits. Sticking with your long-term investing plan makes the most sense right now. In addition, buying on dips should continue to be a profitable investing tactic, at least until the end of the year.
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