The 100 point lower open on Wednesday was enough to make some of the now always bullish TV analysts nervous as they warned that it was long overdue. As had been the case for most of 2017 the stock market reacted by making more new highs over the next two days.
The bullish start to 2018 has likely reinforced the view of many that it was an investing or buy and hold market. The 21.7% gain in the Spyder Trust (SPY) for 2017 was impressive especially for a market where investors were nervous for most of the year.
It was the third best year in the current bull market as the SPY was up 26.37% in 2009 and 32.31% in 2013. Of course 2017 will likely go down in history for its lack of any significant corrections. This made it difficult for those who got scared out of the market and waited for a correction to get back in on the long side.
But does that mean that 2018 will be the same type of market as 2017 or will you be better off as a trader than investor in 2018?
The weekly close chart of the S&P 500 shows that after the nice gain in 2009 there was a 16.7% decline in 2010 that ended in early September when the NYSE A/D line (One Indicator Stock Traders Must Follow) moved to a new high.
It was also a rough buy and hold year in 2011 as the 19.4% correction convinced many that the bull market was over and that we were in another recession. By the middle of October 2011 the A/D line indicator signaled that the bull market had resumed.
In comparison 2012 looks pretty good though there were corrections of 9.9% and 7.7% before the year ended with a 15.99% gain. Even the stellar performance in 2013 was interrupted by a 5.8% correction. The gain of 13.46% in 2014 was respectable even though there were pullbacks of 5.8% and 7.4%.
The market was very difficult in both 2015 and early 2016 as the double digit declines in August and early 2016 kept many out of the market. For the first time in the bull market the weekly A/D line formed a bearish divergence in May that led to the August plunge in stock prices.
There have been several other periods when the S&P 500 has had consecutive years of positive gains.
After the 1987 crash the stock market was higher in 1988-1989 and also from 1991-1993. The best three year gain was likely in 1995-1997 when the S&P 500 was up 100%. It also was up in 1998 there was a 19.3% drop during the year.
Before I switched from biochemistry to the financial markets I spent considerable time studying the e stock market history from 1965 to 1980 and since then it has been my full time passion. As I have commented over the past two few month I expect the current bullish enthusiasm to last for a few months.
For those who are relatively new to the stock market the yearly performance of the SPY in 2013 might imply a market that was similar to 2017. The daily close only chart of the S&P cash shows a much different picture as in addition to the drop of 100 S&P points from the May high there were also sharp but brief pullbacks in August and September.
In contrast the chart of 2017 looks quite a bit different as the uptrend shows few interruptions. There was a slight pullback in April (Bullish Evidence Building) and also at the end of the summer (Correction Over -- What & Where To Buy?) but both were identified as good buying opportunities.
It seems as though a number of investors are now just getting involved in the stock market and I hope those that have will have a firm plan in place to stay long until there are signs of a significant correction or a bear market.
The analysis of the A/D lines is a regular part of my weekly columns and there are no signs of a correction based on the weekly or monthly A/D lines. The daily A/D line analysis is still strong as I Tweeted last week and it would typically take several weeks before it could move into the corrective mode.
Even though there are no storm clouds on the horizon I am still expecting one or more meaningful corrections in 2018. This is due in part to my historical observations on the swings in the market psychology. Often when a market does not correct traders become frustrated and then decide to become investors. Right now everyone wants to be an investor but it may only take is a few 5% or more corrections to change their view.
In over 30 years of teaching about the markets I have often been asked whether it is better to be an investor or trader. Long ago I came to the conclusion the answer is based on the individual’s lifestyle and their reaction to risk. If in the past you have sold out when the market corrects sharply or have been hesitant to buy at market bottoms then the investor track is probably the best for you.
Those who are disciplined and do not tend to dwell on past mistakes often make good traders. Traders have to make many more decisions so there are more opportunities to second guess your decisions. In my mentoring I have found that an aptitude for math is also a plus.
Since I provide both investors and traders advice in the Viper ETF Report I am often asked how the advice is different. The recent market has been characterized by sector rotation as a sector may rally for a few weeks and then move sideways for several weeks while other sectors move to the forefront. A few examples might better explain my approach.
On Monday I recommended the SPDR KBW Regional Bank ETF (KRE) to both investors and traders. It closed strong the week ending December 1st as it broke out of a trading range (lines a and b) that had been in effect for most of the year.
The next week it hit a high of $61 but then moved sideways to lower for the next four weeks as it got as low as $57.98. With the close on January 5th my analysis suggested that the period of consolidation was likely over as the RS analysis had pulled back to its WMA and was in an uptrend.
Even more positive was the OBV which had continued to make new highs over the past month. Volume plays an important role in my analysis as I discussed last week (Using Volume To Buy The Dips). KRE closed up 4.5% for the week and the completion of the trading range indicates it can go even higher.
Though investors have been long the Vanguard Health Care ETF (VHT) since last April. Traders sold their longs during the summer as a correction looked likely. VHT closed Friday at $161.84.
Since then traders have been in the more volatile SPDR S&P Biotech (XBI) and on Monday the SPDR S&P Pharmaceuticals (XPH) was recommended. The technical readings were not nearly as strong as those on KRE as it was below the strong resistance at $44.35 and the weekly RS was below its WMA.
The OBV was acting very strong and Monday’s weakness allowed for a good entry. It closed up 3.5% for the week as the resistance has been overcome and the RS has moved above its WMA. This is an early sign that it may be completing an important bottom and could eventually also be recommended to investors.
In summary I typically pick the more volatile ETFs for traders and tend to sell sooner and take a quick profit. I only give trading advice for stocks in the Viper Hot Stocks where I continue to raise stops scale out of a position when it moves in my favor. With Friday's close there are signs that the small cap iShares Russell 2000 (IWM) is ready to lead.
To decide whether you will be a better investor or trader you will need to examine your past behavior and how market events have effected you. I plan on continuing this discussion in future articles so please send me your questions and comments to Tom@viperreport.com.
If you are interested in following my style of analysis I hope you will consider the Viper ETF or Viper Hot Stocks reports. Specific recommendations are sent out twice each week and each report is only $34.95 per month.