Why the market fluctuates

 

The following chart uses SPY (simulating the market) with SMA-350 for the year of 2020 using Fidelity’s charting function. It will be used to demonstrate how SMA-350 worked for 2020; the dates may be several days off. This article is written on 1/1/2021.

 

 

Market Timing

 

SMA-350 (Simple Moving Average for the last 350 sessions), described in one of my books, worked fine in 2020. It told us to exit the market on about 3/11/2020 and return on about the beginning of June. There were two false signals (on about 4/28 and 5/8) that told you to exit but return to the market shortly.

 

The other indicators are RSI(14) and P/E. Fidelity’s chart uses 80 for overbought and 30 for under-bought for RSI(14). The market has been over-priced for a long while. In this case, technical analysis (SMA-350 I used in my example) works better than fundamental (P/E as one of the metrics); It has been sold for the entire 2020.

 

Why there is a big drop in late March and why it comes back

 

The trigger is the pandemic.

 

The market came back for many reasons:

·         We understood the pandemic better.

·         A lot of money in the sideline.

·         The government supplies more money by printing it excessively.

·         The government lowers the interest rate (almost to zero).

 

2021 prediction

 

It is quite hard to predict the market. Here are my thoughts. The market is not rational (fundamentally speaking).

 

For:

 

·         The government keeps on excessively supplying money.

·         With easy credit, the rising housing market leads to many profitable sectors such as furniture.

·         Due to easy credit and recovering, many companies buy back their own stocks.

·         Low margin interest rate usually boosts the stock market.

·         If the vaccines can control this pandemic, many sectors will recover. As I demonstrated before, we have to wait one more year for some sectors such as airlines, restaurants and cruise lines.

·         Trade war with China could be reduced under Biden.

 

Against:                                                                                                

·         The pandemic has not been stopped.

·         Unemployment is breaking previous record.

·         Small businesses continue to go bankrupt.

·         Complete decoupling with China.

·         The government tools do not work anymore such as lowering interest rate.

·         Super inflation is due to ample supply of money chasing a fixed amount of assets (stocks for example). The status of the USD as a reserve currency would also be shaken.

 

As in any market, there are two camps opposite to each other. Need to watch the market like a hawk and take actions accordingly (talk to your financial advisor first). I expect the plunge would cause the market to lose about 40% if it happens.