Investors and traders tend to focus on the near-to-medium term timeframes. It is fine when deciding on specific entry and exit points to buy and sell. However, the dominant and prevailing major trend, often denoted on the monthly charts, is needed as this trend will likely persist for long periods.
The trend is your friend, and structural and generational trends matter the most when investing over many years and decades. Structural trends tend to persist for 8 to 20 years. Generational trends can sustain for 35 to 42 years.
The stock market is the best predictor of future fundamental and economic conditions. Although the reopening boom that powered a spectacular stock market surge over the past two years has faded, the primary and secular trend from the global financial crisis bottom remains intact. Despite geopolitical concerns, mid-term election uncertainties, and macro-economic fears, the stock market is more efficient and a better predictor than any other indicator.
Over a 5-year window from 2016 to 2020, the average US stock market return has been 13.95%. The average return adjusted for inflation is 11.95%. In the past 20-years, from 2001 to 2020, it has returned 7.45% annually and adjusted for inflation at 5.3%. For the 30-years from 1991 to 2020, the average return is 10.72% and adjusted for inflation at 8.29%.
It is reasonable to expect the average stock market return in the US to come to around 10% annually. When adjusted for inflation, it comes to a 7% annual return. It is one of the primary reasons financial experts recommend holding investments for the long term.
Not everyone has the luxury to buy and hold positions for 20 to 30-years. For instance, many investors nearing retirement or needs to liquate positions to fund retirement plan must sell earlier. A few outliers in the stock market can drag down annual returns. The late-1990s led to the Tech/Telecom Dot.com bubble triggering panic selling. The Global Financial Crisis of 2007-2009, coinciding with the credit and real estate debacle, fueled a global stock market crash.
The widely accepted rule is if the rate of return is high today, then expect it to be lower in the future and vice versa. The concept of mean reversion or regression back to the mean plays an influential role in stock market returns, at least from a longer-term perspective. All investment has some form of risk. There is no guarantee of the 7% historical returns. Nonetheless, the US stock market is efficient. It has the uncanny ability to self-correct market excesses via market corrections and bear market declines, leading to the resumption of the primary uptrends.
Has the structural trend from the 2009 bottom been broken or bent?
Enclosed below is a summary of the monthly chart of the SPX Index. The chart highlights pivotal technical points to support the 2009 structural bull in the SPX Index is bent but not broken. There are three dominant uptrends (green, red, and burgundy dash lines), denoting crucial technical levels. The market actions strongly suggest time is needed to repair the technical damages incurred during the recent market downturn before the resumption of the structural bull trend.
(1) The primary and dominant trend remains the structural bull trend from 2009.
(2) To reverse the structural bull requires violations of uptrends and monthly moving averages.
(3) The breakdown below the 10-mo ma (4,447.60) warns of a decline to 30-mo ma (3,829.55).
(4) Failure to clear the top of the uptrend channel or supply line and resistance at 4,975 (red dash line) and overbought conditions (i.e., MACD and RSI) warns of a pullback.
(5) The equilibrium level is the 30-mo ma (3,829.55) and support #1 at 3,655 (red uptrend line).
(6) Under significant selling, SPX can decline to support #2 at 3,315 (burgundy uptrend line) and the July 2020 breakout and successful Oct 2020 retest of the breakout.
(7) Both key technical indicators (MACD and RSI) warn of further SPX selling before reaching a solid market bottom.
MACD price momentum traded to an extreme overbought level, prompting the recent sell signal. Will MACD retest the extension of the 2020 uptrend channel breakout? MACD histogram also turned negative and has exceeded 2015, 2016, 2018, and 2020 levels. Does it need to test the extreme lows from 2008 to 2009?
RSI overbought/oversold indicator (OB/OS) at 54.14 is trading at neutral levels (50). Although a technical rally can occur in SPX Index, it is not trading at oversold levels (30), suggesting further decline before a more solid market bottom.