It’s hard to catch a falling knife at the right time, but it is still possible. Since peaking at January 26, the S&P 500 is down nearly 9% and the DJIA is down 8%. Is it a good time to enter into stocks? We believe so. 

Technically speaking, the SPY is now trading a little above its 200-day moving average which most of the time has been a good entry point for stocks over the last 2 years. Also, a strong uptrend line has been formed since January 2016 (the last time we saw a correction before the recent one) and Friday’s close fully respected that line which means that till this point, we are still in the uptrend formed since January 2016. 

In addition, a Doji candle took place on Friday. A Doji happens when a candle (a daily candle in this case) makes new lows in a downtrend (or highs in an uptrend) but closing well above that low and ended the day in the green. This means that the bears lost control to the bulls and the reversion of the downward trend is highly likely. 

No fundamental problem in the markets, yet

Until this point, there was no fundamental reason for the markets to crash. The new fiscal stimulus package is a new reason for the stock market to remain at its current level at least. However, we expect that 2019 would be a tough year for the stock market as it would be harder to have a meaningful growth in EPS due to tax reform benefits taking effect this year. Thus, we won’t be surprised if the S&P 500 PE ratio contracted.