Despite some well-founded concerns that the S&P 500 (INDEXSP:.INX) is currently overbought, if this recovery follows historical patterns, the market will continue to grow and investors shouldn’t be looking to pull out, according to a report from Canaccord Genuity analysts Tony Dwyer and Michael Welch.
Going back to the 1980s and 1990s, when the market was at this point in the two previous recoveries top-line growth for the S&P 500 (INDEXSP:.INX) was at or below the current year-on-year growth rate. Whatever noise there might be in the market, the analysts also show that profit margins normally peak after an inversion of the yield curve, but recent Fed statements have pushed back the beginning of tapering and make it unlikely that this inversion is coming soon. That means that we most likely hit the peak in margins, and the markets aren’t quite ready for a downward correction.
Canaccord: The market may be overbought, but it’s not too late to buy
Canaccord’s 14-week stochastic indicator says that the S&P 500 (INDEXSP:.INX) is currently overbought, and most analysts tend to agree, but that doesn’t mean that it’s time to get out. Even if a correction is in the pipeline, there is still value to be gained before it hits. The report argues that the extremes in the market has led to further upside, and that when the stochastic indicator makes such significant jumps it usually means that there will be an additional 5 percent gain over the coming months. Dwyer and Welch estimate that the market will go up another 5 – 10 percent over current levels.
While it seems odd to tell people they should consider buying into an overbought market, this advice meshes with other analysts’ predictions. John Hussman, for example, has said that if the market follows historical patterns he would expect it to drop by 25 percent and for investors to lose out – but he doesn’t actually recommend that people start selling their stocks. This conflicted attitude is similar to Dwyer and Welch’s in that both agree the market is too high, but they believe its current level is due to facts on the ground, not unwarranted optimism. As long as those facts stay in place. The S&P 500 (INDEXSP:.INX) may still be a good place to put your money.