2019's biggest stock chart trends

The key chart trends in 2019, and what they might indicate for 2020.

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US stocks are on track to rebound this year in a big way following 2018's 4% total return decline. Here are 3 charts that illustrate some of the primary trends that helped shape 2019 thus far—and may help indicate what to expect heading into 2020.

Earnings engine drives stocks up the charts

It's been a mostly positive year for US stocks, pumped up primarily by relatively persistent earnings strength (with a recent caveat—more on this shortly) and multiple rate cuts from the Federal Reserve. These factors helped propel US stocks, and most other markets, past concerns of potentially slower global growth, escalating trade wars, and other risks. The S&P 500 has gained 28% on a total return basis, as of mid-December. Globally, stocks have had a great year thus far as well: The MSCI World Index is up 26% on a total return basis.

One key factor that you may want to monitor in the near term is the underlying earnings strength that has anchored the rally this year. In recent months, forward 12-month earnings per share (EPS) growth for the S&P 500 has begun to lag price gains for the S&P 500 (see S&P 500 change in forward 12-month EPS vs. change in S&P 500 chart). Generally, stock prices follow earnings, and if earnings do not strengthen commensurately to support the gains in stocks, that could be a warning sign.

A golden chart

The path to new all-time record highs has been mostly uninterrupted in 2019, save for a few short, yet significant declines in May, August, and September.

Looking at a year-to-date chart of the S&P 500, in March you can see a golden cross moving average signal (a buy signal)—when the 50-day moving average crossed above the 200-day moving average (see US stocks reach new all-time highs in 2019). A golden cross occurs when a shorter time frame moving average crosses above a longer time frame moving average. Since the golden cross in early March, the S&P 500 has risen 14%.

Other chart trends are apparent in this chart. US stocks have used the 200-day moving average as support several times throughout the year. After climbing above the 200-day moving average in January, in only one instance did the S&P 500 break below the 200-day moving average and hold for more than a couple days—back in late May/early June. That move did not sustain a larger bearish trend, and the S&P 500 made higher lows several times in the aftermath (a bullish chart signal). This can be a useful reminder that trend change signals given by breaks above or below resistance levels should be confirmed by volume, other indicators, and other data that might be relevant to your strategy.

Speaking of volume—depicted in the bottom half of the chart—it has tapered off throughout 2019, even as the rally has continued. Of course, volume trends can be seasonal (such as the historical trend to decline over the summer months and around holidays). However, the decline in volume for the S&P 500, relative to higher volume levels in the first several months of the year, may suggest a lack of conviction for the rally to persist into 2020. It can be expected for volume to continue to decline as 2019 comes to a close during the holiday season, and you may want to monitor volume levels in early 2020 for evidence of conviction behind the uptrend.

How long can this low volatility last?

Another trend that has prevailed for most of 2019, and for much of the nearly 11-year bull market rally, is persistently low levels of volatility. Stock market volatility, as measured by the CBOE Volatility Index (VIX), continues to trade near historical lows—with a few periodic blips on the radar (see Volatility as measured by the VIX remains low chart). The long-term average for the VIX is 18, and it has traded below that level for most of the year. It is currently trading near 16.

There's an interesting trend to observe in the chart above. Notice how the VIX and the S&P 500 can have an inverse relationship (when the VIX goes up, the S&P 500 goes down, and vice versa). In late July/early August, the VIX had its largest spike of the year, and the S&P 500 did decline over the same period of time. However, the S&P 500's decline was not commensurate with the size and scale of the VIX spike. The S&P 500 did not make a lower low relative to the previous increase in the VIX that occurred in May. Some chart analysts may have interpreted this divergence as a bullish signal: Despite the increase in volatility and modest decline in the S&P 500, stocks were still in a bullish uptrend. Indeed, the S&P 500 rallied in the aftermath of that move.

In recent months, the VIX has fallen back to extremely low historical levels. At the same time, the S&P 500 has marched higher to fresh record highs. Heading into 2020, investors may want to keep an eye on the VIX, given economic and geopolitical factors that could interrupt this long-term low volatility trend. Among those are ongoing trade wars, rising stock valuations, and significant elections on the horizon.

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