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Plotting a Path for Stocks in August

New month, new market? Here's the most likely outcome for stocks in the weeks ahead.

1.9% -- that’s all that stands between the S&P 500 and new all-time highs as I write.

That’s a position that would have been unthinkable to most investors just four or five months ago. But here we are.

Just to put in context how unusual this snap-back rally has been, here’s a look at ever 30%+ drawdown in the S&P (and its predecessors) since 1928:

fastest_market_rebound_2020

That line all by itself? It’s this year. 2020 literally stands alone in terms of the sheer speed of the rebound.

(You can send your thank you card to Jerome Powell, c/o the Federal Reserve.)

So, what does that context mean for stocks as we head into the tail-end of the summer months?

Last month, the outlook was positive – the S&P 500 blasted through the 3,200 level in a pretty textbook breakout and throwback move that clears the way to the retest of all-time highs we’re looking at this week.

Here’s the chart:

SPX August 2020

There’s no need to overcomplicate things here – in fact, I’ll just copy and paste what I wrote in July:

"Technically speaking, it’s hard to argue that the S&P looks anything but constructive here. The trend line is pointing up and to the right. All-time highs are within reach."

Look for a new high-water mark for the S&P 500 sooner rather than later.

But there’s a caveat to the bullish call here…

Typically, new highs are some kind of reflection of ebullience in the economy and reduced market risks. That’s clearly not the case this time around. Equity market risks are elevated and underestimated right now.

The sky-high correlations between the post-peak S&P and its 1929 analogue are cause for concern, even if it’s not for the obvious reasons. I’ll share an update on that relationship tomorrow.

But stocks can still go up in the face of rising risks. And I expect them to in August.

The 50-day moving average continues to act like a solid proxy for trendline support this summer. That provides a very black and white nearby “bail out” signal if the trend suddenly deteriorates.

For bulls, that means we’re still in a “heads I win, tails I don’t lose that much” scenario – at least as of right now.