Where is the stock market going?

                     

The US stock market since 2009 has rallied for more than 5 ½ years. The benchmark S&P 500 index has moved up from 666.79 to 9/17/14 ‘s 2001.57. This translates to 1334.78 points and 200% gains and there has not been any correction more than 10% during this period.  People are wondering is the big correction coming and where is the market going from this point onward? There are a lot of things need to be sort out first in order to answer this simple but complex question.

There is lot of events happening in the world that causes concerns. The world is complicate geo-politically. There are continue chaos in the Middle East among countries such as Iraq, Syria, Israel, Palestine and the emerging of the ISIS terrorist group which threatens the safety of the world.  And then there’s the Ukraine civil war which has caused the new cold war between Russia and its western rivals---the US and the European countries. Some has even suggested the third world war is brewing because of this.  Any mishandling of these situations can cause havoc to the economic of the world and the stock market. At the present, the economic sanctions applied against Russia by the Western countries not only is harming Russia but has negatively impacting the economic recovery of the European countries. As if this is not enough the independent referendum in Scotland to be held tomorrow if successful will hurt England economically. Japan is weak economically, China is sensing slow down and the fragile US economic growth can easily be wipe out by the weakness of the rest of the world. At the same time, let us not forget the quickly spreading of the Ebola disease in Africa. It will threaten a lot of lives in the world if the situation is not contained. So the above are concerns on the back of investors mind.

With so many negatives, what is driving the stock market up? The answer is very simple, low interest rate and quantitative easing. These feats are not only used by the US Federal reserve but are also adopted by the central banks around the world. These central banks include European, Japan and China, the most influential economies of the world.  As the central banks are printing money and keep interest low, it encouraged corporation and individuals to borrow. Corporation use the borrowed money to fund projects and buy back their own stocks. Investors borrow money to invest in the stock market and real estates. Since interest rate is at record low, there is no other investment with returns that beat the stock market return.  This is why money keeps piling into the stock market and the stock market continues to rally. There is a well-known saying on Wall Street which is: Don’t fight the Fed.

After we have an understanding of the market’s present situation,what can investors do? After all the situation mentioned above are so complicated and we have no way of knowing what will happen next. And it would drive you crazy to analyze every situation in detail. So, what investors can do is simple, follow the existing trend. After all, the trend is your friend is what they say. What is the stock market trend looks like? The stock market trend is up. How do we know? That is what a price chart is most useful for. It keeps things simple and avoids confusion. The following is a price chart for the S&P 500 covering last few months of price action. As we can see, the S&P 500 is now trading above its 50 and 200 day moving averages, as many market practitioner can immediately tell you that the S&P 500’s trend is up. Since it is so close to its all time high, it may follow the strength of the Dow and make new historic high since the Dow made new high intra-day today. So at this time, investors should keep their stocks and ride the trend up. The question is when do we start to get worry? The answer is when the S&P 500 drops below its 50 day moving average at 1973 for short term trader to get out and for long term investors when the S&P 500 drops below its 200 day moving average at 1890.