It might seem like 2020 is a year that highlighted the flaws of relying on, in some part, charts and patterns to tactically trade stocks. After all, no chart was of much help amid the rapid stock market plunge at the outset of the COVID-19 pandemic earlier this year. Even after that precipitous decline, when unprecedented amounts of government assistance and central bank support helped asset prices (e.g., stocks) rapidly recover, signals given by chart trading tools were simply overwhelmed by the pandemic response from governments worldwide.
But there may be valuable takeaways from this experience. If you are an investor who likes to incorporate charts into your analysis, you should always consider utilizing more than just the information found in a chart—such as public health trends, in this year’s case—to execute your strategy. Perhaps more importantly, there can be times when you need to adjust both your long-term and short-term strategy. Even if tactically trading the market with some percentage of your overall portfolio is a component of your strategic plan, market upheavals like a global pandemic can be a reminder that sometimes you need to alter your approach to adapt with the times.
With that said, here are 4 charts that illustrate some of the primary trends that helped shape 2020—and may help indicate what to expect heading into 2021.
Resilient stocks amid a challenging chart environment
A year-to-date chart of the S&P 500 broadly depicts the precipitous market decline in February and March, followed by a multimonth recovery that has US stocks now trading at new all-time highs (see US stocks rally to new all-time highs after fastest plunge on record below).
From a technical analysis perspective, little evidence exists that there were price pattern warning signs for a chart user to have been able to uncover in the weeks and months preceding the pandemic outbreak.
For instance, one of the most commonly used trading signals by chart users is the moving average crossover system. Sell signals are given by a shorter-term moving average (such as a 50-day exponential moving average) crossing below a longer-term moving average (such as a 200-day exponential moving average). The chart above shows that a sell signal was generated by this so-called “death cross” moving average crossover back in mid-March. However, nearly all of the pandemic-induced losses had already occurred.
In early June, the S&P 500 witnessed a golden cross (where a shorter-term moving average crosses above a longer-term moving average). Stocks have rallied 24% since this bullish crossover signal was generated. Of course, this buy signal was several months after the March nadir.
When governments around the globe enforced shutdowns back in March, the market reacted with one of the fastest selloffs in history—and for good reason. The unemployment rate and unemployment claims skyrocketed to multi-decade highs (see Jobs market still not back to pre-COVID levels chart). Manufacturing activity, retail sales, consumer sentiment, and global travel saw historic declines as well. There was essentially no aspect of the global economy that wasn’t impacted, sending a number of countries into recession.
All of these metrics have improved dramatically since early spring 2020. But a major concern going forward, despite the optimism surrounding vaccines and improving treatment methods, is that the number of coronavirus cases has accelerated in recent weeks. The total number of new cases has soared toward 70 million worldwide, as of mid-December, with 1.5 million deaths confirmed (see Total number of COVID-19 cases and mortalities chart).
Trends in new COVID-19 cases—as measured by new cases, deaths, and test positivity rate—are currently at or near their most concerning levels during the entire pandemic. In the US alone, more than 200,000 Americans are testing positive each day using a 7-day rolling average, according to data from Johns Hopkins. That brings the total number of infections above 15 million. This has resulted in a slowdown to the recovery.
Investors have pinned their hopes, in large part, upon the delivery and efficacy of vaccines. It’s almost a certainty that trends in new COVID-19 infections will drive the short-term direction of stocks heading into 2021.
Improvements or deteriorations in these trends will have massive implications for essentially all businesses, but most specifically for restaurants, airlines, hotels, and cruise ship operators, to name a few. Many businesses, both small and large, are struggling to survive or have already been forced into bankruptcy.
Refocusing on earnings
Despite these concerns, bullish investors appear to be looking past COVID-19. While the S&P 500’s earnings per share (EPS) has recovered substantially, it remains well below pre-COVID shutdown levels (see Next 12 months earnings attempt to recover from COVID chart).
Will earnings growth continue to be positive and will it be sufficient to support stock prices at record levels? Will the alarming trends in coronavirus cases force investors to lower expectations?
Regardless, it’s probable that government stimulus will continue to play a larger role in driving financial market performance than in past cycles. During this stage of the business cycle, riskier assets such as small caps and stocks of companies in more economically-sensitive industries to do well as activity improves.
But there has never been an investing environment like this one. Trends of the past may not replicate in the future if they are washed over by worsening public health trends. Likewise, chart users may want to continue to exercise extreme caution if trading based on identifiable chart patterns.