New year, new market?

It was a spectacular year for the stock market in 2019 – on paper, at least (more on that in a moment).

On a total returns basis, the big S&P 500 index charged more than 31.4% higher between the session a year ago and champagne corks popping this week. That’s the best year in the books since 2013.

Now, the first trading session of 2020 is well underway – the question now on every investor’s mind is what kind of returns loom in the year ahead.

With massive gains in the books for 2019, what are the chances Mr. Market can end up in positive territory again?

The good news for investors is that there could be more upside ahead in 2020 – a lot more. But it’s also unlikely to be a straight-up rally year.

To figure out why (and how to trade it), we’re turning to the charts for a technical look.

Ironically, it’s a little misleading to call 2019 a clear-cut breakneck rally year. On paper it was the second-best year for the S&P 500 in the last two decades. But practically speaking, that was an artifact of the abysmal fourth quarter of 2018, when the S&P 500 shed about 20% of its market value between the start of October and Christmas Eve.

The fact that the end of the correction lined up almost perfectly with the end of the calendar year skews things a bit.

For instance, stocks were essentially treading water during the more than 600-day stretch between February 2018 and October 2019. The broad market spent the better part of the last two years in a time correction, only breaking out to meaningful new highs in the latter part of last year.

That’s the context that investors should be keeping in mind as they weigh whether the S&P 500 can keep on rallying in 2020.

Looking at the charts, the S&P 500 is clearly still well within its bullish trend channel. But both in the long and short-term it is hovering near the top of that trading range.

Screen Shot 2020-01-02 at 10.04.18 AM

That doesn’t necessarily mean that a correction is imminent. But it does mean that a correction wouldn’t be particularly concerning for this rally’s staying power in 2020.

A little more than a year ago, right at the S&P's lows, the technical setup pointed toward 24 months of outperformance. That outlook remains in play here. 

Likewise, the sideways correction that the S&P finally exited this fall looks a lot like the correction that stocks endured between late 2014 and the new highs of late 2016. That led to a 22.5% total return in the S&P 500 over the subsequent 12 months the last time it happened; if history rhymes here, it means that we’re in store for another rally leg in the year ahead.

It might sound counterintuitive, but from a statistical standpoint the stock market typically follows up strong price performance with more upside. Since 1987, the average annual return of the S&P 500 has been 9.7% - but the average return of the S&P 500 following a 20%+ rally is 11.8%.

That’s almost a fifth more upside, on average, following banner years for the stock market.

And given the context of 2018’s year-end selloff, the fact that 2019’s rally is really less extended than it appears on paper likely gives a 2020 rally more staying power than average.

Stocks are off to a decent start this year, putting in new all-time highs in the very first trading session of 2020. Investors should expect more of where that came from.