While we’ve been taking defensive measures this past month-and-a-half, our long-term hope was to see the stock market bounce off the October and November lows toward the end of this week into next. So far, at least as I write this week’s update on the current state of the market (at 1:15pm EST), I’m not seeing that long-awaited floor of support hold. With less than three hours to go in this week’s market action, there doesn’t seem to be enough buying enthusiasm to push prices back up and into the neutral, sideways pattern that has developed since mid-October and now it’s time to re-evaluate what the market is telling us today.
We never want to exercise biases when it comes to the market. Of course, we all have biases and heuristics that we fall victim to… but we need to be aware of them, so they don’t get in the way of making sound decisions in our retirement portfolios. To elaborate, but put things simply, Jesse Livermore puts it best:
“Don’t act on your opinion until the market, itself, confirms your opinion.”
We have to ask ourselves very simple questions that don’t always need complicated answers:
Question: Do we want to invest with the trend or against it?
- Answer: I think the answer is almost always “with the trend” of course.
Question: Are we short, intermediate, or long-term investors?
- Answer: I think most people are long-term investors, but don’t want to lose money in the short or intermediate-term.
Question: Based on our timeframe, is the trend up, down, or sideways/trendless?
- Answer: This is where we need to stay on the ball and analyze the markets regularly. So let’s take a look at where we are…
Feel free to look back to previous updates on the market for old charts and analysis by clicking here, but ignoring the past, the chart below is where we stand today, which is really all that matters. Use the #’s on the chart which correspond to each bullet-point below as we analyze the crime scene that represents today’s market climate. Let’s see if we can build some evidence one way or another:
- The market (S&P500) is below its 200-day trend (red trendline). (Negative evidence)
- The 200-day trend is flat/trendless with a slight downward bias, the 50-day trend (blue trendline), is clearly sloping downward, and the 50 is below the 200-day trend. (All are negative pieces of evidence except for the trendless point, but none of this is positive)
- The market has been bouncing up and down, as buyers battle the sellers this past two months, but at #3 below, the market fell thru the first, red-dashed line and violated an important floor of support represented by the November and October lows. (Negative evidence)
- Lastly, a more technical indicator that measures momentum (Moving Average Convergence/Divergence – or MACD for short, invested by Gerald Appel) had been diverging positively against price over the last several weeks, which was originally one of the remaining positive pieces of evidence I was watching for a near-term market rally. This week, the uptrend in momentum (blue diagonal dashed line in the lower pane) broke down (Negative evidence)
In order for the trend of the market to head back northward again, we need it to reclaim the red-dashed line at #3, above. Then, we need it to break back above the top of the sideways ping-pong match (the first, blue-dashed line) that has played out since mid-October. These things both have to happen before we can see some serious, positive traction. So that leaves us with one more question for today…
Question: How do we invest based on the direction of the prevailing trend?
- Answer: This is where you need to have your own strategy that works for you. Some people believe in being passive, staying in the market, and letting things ride. Some want be strategic, rebalancing their retirement portfolio throughout the year, but generally staying in the market at all times. Others (like us) believe in taking a more tactical approach, dialing up the amount of protective cash we have on hand and dialing it back down as the market landscape changes.
If there is something positive to invest in – something with a good, solid trend in place with healthy momentum – then we always want to move our money into something that can provide positive performance. However, there are very few investments out there that are currently exhibiting positive, long-term trends, even outside of the stock market. For example:
- Commodities (DBC) are down almost -6.85% YTD as I finish up this article
- International Stocks (ACWX) are down -13.91%
- Even bonds, which are always referred to as “safe,” are down -6.57%
Now please understand, there is no such thing as a perfect strategy. Our portfolios were whipped around once in 2011, causing a lag in performance as the U.S. Treasury downgrade occurred. They were whipped around again in 2015-16 (twice) as the market looked like it was poised for a crash, which also caused a big lag.
However, as my pilot friend up in Cleveland always says, “I’d rather be on the ground wishing I were in the air, than in the air wishing I were on the ground.”
On one hand, being passively invested and staying in the market all the time is a lot like driving through white-out weather conditions in a severe storm with tornado warnings sounding all around you. On the other hand, being tactical is a lot like letting off the brakes when the clouds get thick, hitting the brakes and slowing down when the downpour begins, stopping under a bridge in white-out conditions, and if need be, finding shelter in the case that a tornado touches down.
So using these analogies above, the same can be said for retirement portfolios and risk management, as “I’d rather be scaling out of the market, wishing I were 100% in than to be in the market at 100%, wishing I were scaling out.”
As the holiday season has begins, try not to worry too much about your money. If you’re concerned about the strategy you implement currently and would like a second opinion, make it your New Year’s Resolution to reach out and allow us to provide you with a free, no-obligation review of your financial plan and retirement portfolio. Even if you have a quick thought and you want to use us as a sounding board, you never have to be a client to ask a question.
Meanwhile, have a relaxing weekend and we hope to hear from you soon!
Till next time…