Investors have been fretting about the possibility of a second stock market crash in 2020 for some time. Meanwhile, the US stock market has been shooting higher. Some believe optimism about the development of a vaccine for Covid-19 is driving stocks up.
Indeed, if one of the many development programmes delivers a safe and effective vaccine to the world anytime soon, our economic worries will likely begin to fall away. And shares will probably advance higher because of progress in the businesses behind stocks.
A second stock market crash may be imminent
But this week, CNBC’s Jim Cramer pointed to prominent, long-time chartist Larry Williams who reckons the current rally in the markets will be short-lived. Williams is being specific. He reckons the S&P 500 index in the US will climb for a week or two and then begin to roll over around 28 July.
I admit I’m not a big fan of charting and tend to base investments on the fundamentals underpinning a business. For example, it’s opportunities in the markets served and valuations as assigned by the stock market and reflected in share prices. However, it seems clear that part of what drives the stock market is investor speculation, and charts can be useful for gauging that.
Williams is studying the American stock market and not the indices here in the UK. But there’s no denying that UK shares, in general, tend to follow the US markets, at least in the short term. So, is Williams onto something, and should we hunker down for another plunge in shares?
He focuses on seasonal patterns of the market and reckons July tends to be a bullish month for stocks. So far in the US markets, that’s happened this year. Although in the UK, the FTSE 100 has been volatile. But, charting prior ups and downs, Williams reckons the market could peak near its old highs near the end of July. Ominously, he thinks those levels “will be fleeting,” according to Cramer.
The longest bull run in recorded history
The S&P 500 index is close to its all-time closing high of 3,386. That level was achieved in February before Covid-19 caused the markets to plunge in the spring. The high marked the end of “the longest bull run in recorded history,” noted Cramer.
It does seem to me the ducks are lining up for a pullback in the markets across the pond. And indices and share prices often bounce back from previous highs before resuming their upwards trajectory. On top of that, there’s a strong argument that speculation in the US markets has driven valuations too high.
Neither Williams nor Cramer attempted to quantify the pullback they think is coming. But Cramer said Williams expects it “to hurt.” So, I’m preparing for any weakness in the stock market, or indeed a second crash this year.
As usual, I’m doing so by working hard on my watch list of quality shares so I’m ready to pounce if the market offers me a bargain. I’m also focusing on investing for the long term.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.