When I write about a particular company or sector I start by laying out the overall scenario. It’s important to know the environment within which we are risking capital. In this case it’s going to be different because the topic today is the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). This of course is the ETF that tracks the S&P 500 index. SPY stock is essentially the offspring of the S&P.
SPY stock made new highs this week which makes tricky to trade. Immediately we can bifurcate the course of action between short- and long-term goals. Not everyone is on the same investment course so there can’t be one right answer today.
The patient investors need not work too hard trying to find good entry points. Eventually it won’t matter much if I buy SPY stock at $378 per share or $320. It seems like a big difference now, but it is a drop in the ocean. A 15% correction is not a big deal in the grand scheme of things.
I can imagine that there will be headlines in the next three weeks that will rattle investors. We’ve seen many of those come out in the first quarter in recent years.
Since the actual SPY stock charts go from the lower left to the upper right, then it’s a fact that stocks rise over time. The easy conclusion today is to hold it for the long term. Since those charts are not a straight line over time then it’s also fact that there will be painful stints. Long-term investors need to hone their ability to grit it through corrections.
Think back to how it felt during the 2008 financial collapse.. SPY fell to $67 and the S&P index bottomed in 2009 at $666 per share. In hindsight it appears idiotic to not have gone all in. But in reality, at the depth of despair it wasn’t a clear course of action for buyers to step in.
To make this long term strategy work investors have to commit. Upon initiating a position they should put it on a sticky note to ignore near term pain.
Trading Shorter Term Versus Investing
Trading shorter term is a bit more fun and requires a little more work. First thing to do before trying to time a trade is establish who is in charge of the price action. This is a crucial step that many people don’t even recognize as part of their process. Without it I lose an edge because I wouldn’t be able to predict the trend.
Currently, the SPY stock technical metrics all say the same thing: The buyers are in charge! I know it sounds like an “duh” statement when indices are at their all-time highs. But in reality sellers can temporarily take the reins even in bullish trends. This is not one of those times. Here is a TradingView technical snapshot for the daily candles:
Source: Charts by TradingView
Knowing this we can assume that investors will buy the dips. Meaning after a bad day I don’t start looking for stuff to short. Instead, the smarter thing to do is try to find SPY stock support levels to buy. Without taking the time to find out who’s in control this is an ace we’d be missing.
SPY Stock Fundamentals Are Solid
I am not here today to argue for value. Nothing is cheap when prices have never been this high. Even in 2018 things were expensive and yet here we are setting records. Investing doesn’t always have to make sense, especially short term. Going with the flow works especially if traders book profits along the way.
I don’t disagree about the valuation concerns especially in a few new breeds of stocks like SPAC spawns. Even the SPY price-to-earnings ratio is about 30% higher than its run rate. But I definitely don’t try to short the market for that reason alone. I would need to see signs of sellers overwhelming the buyers. So far the bearish stints are lasting hours at best. Case in point, the buyers jumped in with force after the few dips we’ve recently had and on seriously bad headlines.
My hunch is that the rally can continue through January. In the beginning of February we might encounter problems. I would suggest that they would indirectly stem from the Federal Reserve. I am not saying that they will say or do something bearish. We could get a report about either inflation or yield spike way beyond our expectations. Such talking points will make their rounds in the financial media and rattle investors like they did in 2018. That would be the chance for the bears to sustain the selling.
Yes, I am suggesting there could be a problem in the stock market just a few weeks from now and I am not worried. I don’t want to be an alarmist when there is no need for it. Sure, we can get a cataclysmic shock to break the financial system. But waiting for a “black swan” is not a tradable event. The only way to avoid that scenario is to stash your cash. I hear Bitcoin is a hip new thing (#sarcasm).
The Reasons for Bullish Conviction
Source: Charts by Yahoo Finance
The reasons I am confident in SPY stock today is its components. The top 10 stocks make up 28% of the whole thing. Of those 10, only Tesla (NASDAQ:TSLA) is exorbitantly expensive. The rest like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Johnson & Johnson (NYSE:JNJ) are reasonable.
These are unique circumstances unlike any other time before. To combat the pandemic, all governments created a situation that crippled businesses. Now they are spending trillions trying to re-jolt their economies. This means that there are trillions of dollars hitting main street America. People don’t usually save the money. They buy gadgets and invest it on their homes.
I pride myself on not being from Wall Street but today I will borrow from their handbook. They say to not “fight the Fed” and this is a gargantuan version of one. They also say to not “fight the tape” and it’s been one record after another. Even last night indices were making new all-time highs. The small-cap futures, which is a basket of 2,000 stocks set a new bar. SPY stock rose to $381 per share.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.