We Might Have Just Had Our Bull Market “Blow-Off Top”
But Why We Probably Didn’t Actually Have it Yet
The end of a bull market is supposed to do be the most exciting. The gains during the final stretch are unbelievably high. With the returns from the market recently, it begs the question, is this bull market coming to an end?
Blow-Off Top
A “blow-off top” is when the price of a stock or general market increases sharply, only to be followed by an as sharp decrease in price.
A blow-off top is a chart pattern that shows a steep and rapid increase in a security’s price and trading volume followed by a steep and rapid drop in price usually on significant or high volume as well.
As a bull market nears its ends, the gains are too good to miss out on. As people buy into the market, fearing they will miss out on gains, it drives the price up to unstable values. Investors who have been in the market long enough, take their profits. As people start to sell and lock in gains, the price drops, causing a frenzy as others try to get their money out before the price goes even lower.
Why the Current Rally Might End
The S&P 500 had its longest bull run in history ended in February because of the coronavirus. After a decade of steady gains, things came crashing down in a little over a month. Now the market is back like it never left. The market is up 65% since it bottomed out less than a year ago. 65% return in less than a year!
The S&P closed in October at $3,269. It closed the first week of January at $3,824. That is a 16% gain in 2+ months.
Tesla has been on another level lately. Not only did they dominate 2020 by returning 700%, the stock was up another 22% in the first week of 2021. How much more steam does this thing have?
As stock prices keep soaring, when will people start to realize profits? Some may be inclined to take their profits now while others may still in and not want to take their gains until it is too late.
When Q4 earnings start getting announced, how will the market fare? Will analysts be happy if companies' top or bottom lines are still too far from pre-pandemic numbers?
With stocks at all-time highs, it may seem the risk is greater than the reward going into the next few weeks.
Why The Bull Market Will Likely Continue
Which of the many reasons do you want to hear first?
I’ll start with the latest from President-elect Joe Biden, as NBC News said,
[Biden] favors setting aside concerns about the federal deficit in order to spend more money to boost the ailing American economy.
This is on top of the nearly $4 trillion the US government has printed out in stimulus money in 2020. Easy money means easy profits right? As more money has been circulated, it has found its way to the stock market and inflated prices. With more government stimulus coming there is reason to believe the stock market will react the same.
And as we know, the stock market looks to the future. What’s in the past doesn’t matter. The millions unemployed, rising coronavirus cases, growing debt, potential inflation, or slowing global growth is history. We have vaccines now. The end is in sight.
The news of vaccines and thoughts of a “normal” society in the second half of 2021 is music to investors' ears. With life back to normal and an open economy, people will abandon these record-high saving rates and go back to increased spending, which should benefit companies and therefore stock prices.
Need a technical reason to think the market is not topping off right now? Look at the chart of the S&P 500 from any time to today. 1 month, 1 year, 1 decade, 1 century. Sure there are some downturns, but it always comes back and sets new records.
As they say, “Time in the market beats timing the market”
