Stocks are back in business!
Yes, a little more than a month after some of the worst investor sentiment readings in years, soaring volatility, and a 19% decline in the S&P 500 – not to mention both the Nasdaq and the Russell 2000 swinging to bear market territory – stocks are suddenly on a roll, recession fears are abating, and, perhaps most importantly, tariff deals have been struck.
The 90-day pause on most reciprocal tariffs initiated by President Trump on April 9 – one week after the deeply unpopular “Liberation Day” was announced – triggered one of the biggest one-day rallies in stock market history. Indexes flirted with their early-April lows two weeks later but eventually stabilized, and May has brought a wave of positive tariff news – first, a deal with the United Kingdom, in which key imports like cars were reduced to 10% and steel and aluminum tariffs were eliminated; then, last weekend came a 90-day truce with China. That sent stocks soaring more than 3% on Monday, and they haven’t looked back.
It was enough to push the S&P decisively above its 200-day moving average for the first time in over two months.
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The last two times that happened in this two-and-a-half-year bull market (the bull market never technically ended in the S&P), stocks continued soaring to new all-time highs (see chart below: the red line is the 200-day moving average).
Does that mean the same thing will happen this time? Certainly not. In fact, the first time the S&P shot past the 200-day line during the current bull market – in January 2023 – the rally fizzled within about two or three weeks, and the index came crashing back below its 200-day line – albeit briefly – in early March. Given that all but the U.K.’s tariffs are merely paused and not signed to much more palatable deals, this could be a similar false start.
Why the 200-Day Moving Average Matters
Still, the 200-day line is an important technical hurdle, and one that felt miles away as recently as the beginning of this month. Getting back above it means that a) the bottom is likely in the rearview mirror, and the bull market in the S&P should continue for several months; the last two times it happened, stocks continued to rise for an average of four months (three months once, five months the other time); and b) there’s real momentum in the market for the first time since just after the election last November.
Technical analysis can often be viewed as mumbo jumbo by some investors, but in some cases it can offer up important historical “tells” like this one. There’s a reason the 200-day line has largely acted as a line of demarcation during this bull market, as stocks have traded mostly above that threshold; when they’ve dipped below that line, it’s fallen into correction territory. Conversely, the 200-day moving average acted as a ceiling for nearly all of the last nine months of 2022 – the last bear market.
It’s a line worth paying attention to. The fact that the chart above shows that the S&P’s gravitational pull for the past two and a half years has been well above that line shows the market is still healthy. And now that the market is back above that line, you should take it as a green light to deploy some of your excess cash on stocks that have been on your watch list or to expand portfolio positions that you like most.
If you need a little help identifying which stocks to pick, I highly encourage you to subscribe to my Cabot Stock of the Week advisory – essentially an ETF of the best stock picks from among eight Cabot newsletters, with a new recommendation every Monday. It’s by far our best-performing investment advisory.
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