After rallying 45% in the last two months, the S&P 500 saw a little pullback last week, falling 5% on profit taking and fears over a second wave of COVID-19.
Take a look below at the S&P 500 chart for 2020. You can see the big selloff because of COVID-19, the big rebound, and then this week’s pullback.
Why Did Stocks Fall?
I see two reasons stocks fell last week.
The S&P 500 was overbought in the short run: After the huge 45% rally in the last two months the S&P 500 was looking overbought in the short run. The relative strength index (RSI) is a technical indicator that measure when stocks are overbought and oversold. As you can see in the chart below, the RSI had recently reached an extreme level of being overbought and that triggered a round of profit taking. Take a look below.
New fears over a second wave of COVID-19: Stocks were hit by some new fears over a second wave of COVID-19. According to recent data there has been an uptick in COVID-19 cases in some state. Take a look at this graphic from the New York Times.
Is It Time to Worry about Stocks?
I do not think it’s time to worry. In fact – I view any weakness in US and global stocks as a chance to buy the dip. Here’s why.
In the long run the S&P 500 isn’t close to being overbought: The relative strength index is saying that the S&P 500 isn’t even close to being overbought. This is an important signal that tells me despite last week’s setback stocks still have plenty of room left to run higher. Take a look below.
COVD-19 second wave isn’t a real threat to stocks: When COVID-19 first hit the world and stocks knew nothing about what to expect – and immediately a worst case scenario was priced into stocks. That’s why the S&P 500 fell 35% in four weeks, one of the fastest and sharpest declines ever. Now – more than four months later most of the mystery is gone. Consumers know that even if we do see an uptick in new cases most of life will carry on as normal. Bottom line – COVID is no longer the mega threat that it was early in the year.
Here is My Plan Moving Forward
I know my clients are seeing tons of negativity and fearmongering in the media. However – I am extremely optimistic about stocks.
I think the S&P 500 is going to finish 2020 well into a new all-time high.
That’s why I view any weakness in the stock market as a chance to buy low.
My plan is to buy more stocks for my clients on bouts of weakness.
I’ll be back next week with another update. Have a great day!