The S&P 500 ended 2017 with a 19.4% gain, marking its best return since 2013. Does that mean the opportunity to buy US stocks has passed us by?
This year the S&P 500 started strong in January, and then something happened. Concerns around the pace of interest rate increases and then US – China trades wars led to the index falling nearly 4% in February and a further 2.6% in March. The result was that the S&P 500 finished Q1 2018 down 1.17%.
In recent weeks, though, the US stock market has found a stronger footing on the back of a blockbuster earnings season and since then has now largely traded sideways. The questions is should you be scared and run for the hills or should you be looking to take advantage of this recent volatility?
Our answer is simple… History suggests you should be using this short term pull back to BUY US stocks NOW!!
If you’re a growth investor, that is an investor looking for higher share prices, it’s a good idea to check what institutional investors or the ‘smart money’ is doing. In many markets, stock prices are influenced by institutional buying and selling. A certain company’s stock price rises when the majority of ‘smart money’ investors are buying its shares and falls when they off load their shares.
These money managers move billions of dollars around into different companies and asset classes and they have the buying and selling power to influence the direction in which share prices, in general, move.
As the chart below shows, a recent Commitment of Traders (COT) report for the S&P 500 Index shows the smart money are buying US stocks in a big way. The report shows the net long and short positions for the S&P 500 index futures contract. When traders increase their long positions, you have a bullish bias, while an increase in short positions is indicative of a bearish bias.
Right now this one report COT report shows that the smart money is upbeat on the S&P 500, with bullishness at levels seen only three other times since 2011. The bullishness was observed during the corrections in 2011, 2015 and 2016. During these three periods, the average returns observed were as follows:
- 3-month return: 6%
- 6-month return: 9.2%
- 12-month return: 17%
Since 2011, US stocks have increased 11% annually. However, the important takeaway is that returns have been higher when COT reports showed a bullish bias among the smart money.
Given the current COT report, it may be that the rising market is here to stay and this recent market volatility is nothing more than a short term correction. The wild ride in the US stock market seems to be calming down.