SPONSORED — With fall upon us, many investors are expressing concern about the direction of U.S. equity markets. After what many consider a rough summer, it’s easy to be concerned about what lies ahead. Particularly since September has, on average, delivered poor results. That said, October usually brings positive results for investors. Sound confusing? Here are a few things you should know about what the coming months mean for your investments.
The markets might be overbought
There are many technical indicators showing the markets are overbought, including RSI, Stochastics as some fundamental valuations. Recently PEG, which is the growth rate of price to earnings, began warning of that as well. Many market experts are talking about a correction.
“Many investors and traders are looking for a significant correction — something along the lines of summer, 2015,” said Ken Peterson of Online Trading Academy.
August and September of 2015 saw a 12.5 percent correction in the S&P 500.
…but a major correction is unlikely
According to Peterson, while a correction of the magnitude of 2015 is possible, it’s highly unlikely.
“We started 2017 in the roar of the Trump boom,” he explained. “The market has not gone straight up, but the pullbacks have been minor. Further, each pullback has been merely single-digit.”
Look at earnings for second quarter. The surprises to the upside have far outpaced the surprises to the downside. Further, if you look at a chart you will see demand levels are holding. What this means is the big banks, mutual funds and large investors are willing to invest more money as price retraces to them or where they already have orders.
Things could go higher
“If the big guys were panicking, price would be breaking through these levels and the corrections would be larger,” Peterson said.
But the cash positions of large institutions and big investors — like Icahn, Buffet, Dalio, Johnson and Bloomberg — are holding larger than average cash positions. This is because this cash is used to buy on pullbacks when prices are cheaper.
“Yes, prices are high,” Peterson said. “But as long as large investors have money on the sidelines, things can go higher.”
The economy is strengthening
Fearing a correction — or recession — is likely unfounded. That’s because the underlying fundamentals of the economy are strengthening. In fact, the second quarter of 2017 was the first quarter in nearly a decade that U.S. real economic growth topped 3 percent.
“So far, it is looking like third quarter 2017 will be the second in nearly a decade,” Peterson said.
Additionally, earnings in the second quarter of 2017 were also promising. Even retailers — a sector that has been struggling — saw impressive results.
Big players have room to grow
Many investors wonder if it’s prudent to trim some of their long positions. According to Peterson, the answer is probably yes — with a caveat.
“Do you really want to exit Apple (AAPL) or Facebook (FB)?” he asked. “No, those companies have a lot of room to grow. Are there equities out there that are overbought? Yes. Could they pull the broader markets down? Yes. So do your homework. Invest in strength and sell weakness. Look to enter strength at the same price point as the big banks. They aren’t paying $170 for Apple. Why should you? Learn how to time your entries and exits to your advantage.”
For more information on investing wisely, visit tradingacademy.com.
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