Why Investors Should Buy the Next S&P 500 Pullback

buy_sell600X300Mike Burnick: Three-and-a-half percent! That’s how much the S&P 500 Index has gained since it notched a fresh, 52-week high last month, on July 8, after a long pause of 414 days since the last 52-week high for the blue-chip index.

A 3% gain in just 20 trading days is nothing to sneeze at, and it may be just the beginning of more upside gains to come in the year ahead.

Last month in Money and Markets, I alerted you to a rare and powerfulbuy signal for stocks. I explained exactly why new highs after a long pause have historically been very bullish for the stock market over the next year.

But as a quick refresher, here are the details…

History shows that whenever stocks take a “a long pause” between 52-week highs and then finally break out, stocks go on to post even bigger gains, according to Merrill Lynch research.

BulletOne year later, the S&P 500 is up 91% of the time, posting average gains of nearly 16% …

BulletThat’s more than TWICE the average gain of just 7.5% for any random one-year period going back to 1929 …

BulletIt’s a rare ultra-buy signal for stocks, which has only happened 23 other times back to 1929, and it’s been consistent, producing big gains for stocks 9-out-of-10 times in the past!

Hat tip to Merrill for the updated chart below, which shows the path stocks are likely to take based on previous ultra-buy signals in the past.

Note the tiny red line at bottom left. That’s the current trajectory stocks are on now, in 2016. As you can see, this rally has only just begun, if history is any guide.

Still, just about every investor I talk with these days is spooked about the NEXT stock market correction, which many fear is lurking just around the corner.

Or worse, they’re worried that after a seven-year bull run since 2009, that this bull market is almost over with another bear market looming.

The stock market has already overcome a number of risk factors on the way to its 5.9% gain year-to-date, including: Brexit, slowing GDP growth and persistent signs of deflation, as reflected by deepening negative interest rates worldwide.

Still, stocks have managed to overcome all this. But next up on the laundry list of things that could “go wrong” is of course the November election.

For my money, I’ll let the market’s price action be my ultimate guide, and right now trends look bullish. For instance, take a look at the sector rotation that’s now underway shown in the table below.

Nearly all of the sectors that have led the stock market’s rally, post-Brexit, are cyclical stocks.

Technology has led the way with a 13.4% gain after some excellent earnings results from bellwether stocks like Facebook (FB) and Amazon (AMZN).

Health care is #2, up 9.7% post-Brexit after underperforming the market during the first half of 2016, mainly due to election year uncertainty.

But the next five leading sectors are all cyclical, with financials and materials up over 9% and industrial stocks up 8.6%.

This isn’t the kind of leadership you’d expect if we were heading for a recession and bear market, when defensive stocks typically lead. That was the story during the first half of this year, when telecom and utility shares led the way … nowhere for the overall market, but that’s all changed now.

And this shift in leadership is a bullish sign for the market, especially when beaten-down financial, industrial and material stocks are able to rebound strongly just as the stock market notches new highs.

That’s not to say a stock market correction is off the table by any means.

After all, we are moving into the seasonally weakest period of the year for stocks, from August – October, which is the only three-month period of the year when stocks have declined on average. And September is the cruelest month historically, posting an average decline of 1.1% since 1928!

So a 5-10% correction is certainly possible in the months ahead, in fact it’s overdue, but that could give you a great chance to buy. As long as the market trends I’m watching stay bullish, any correction should be greeted as a buying opportunity for more gains ahead!

The Vanguard 500 Index Fund (NYSE:VOO) closed up $0.19 (+0.10%) in Thursday’s session. VOO, which is the third largest ETF that tracks the S&P 500 index, has gained 6.23% year-to-date.

This article brought to you courtesy of Money and Markets.

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