This week marks the 9th anniversary since the bottom of The Great Recession. There will be some that suggest we have already experienced two crashes since then:
- The subsequent 60-day drop in the market following the U.S. Treasury downgrade in 2011, and/or
- The 20-month, sideways market between summer of 2015 and fall of 2016 when the market fell more than -12% and then fell again to the tune of -14% just a few months later.
In the end, you can decide for yourself. In the chart below, you can clearly see the dot-com bubble and mortgage crisis crashes without any hesitation. But the two that followed – were they crashes? Maybe they were, perhaps not as bad as the previous two? You be the judge…
I’m not here to argue about whether or not one of the above time frames was a crash or not. I simply care about the current trend. However, when it comes to defining a traditional market crash, I’ll be using the Ned Davis definition (a top-to-bottom, -20% drop in value on the S&P500) and it’s been nine years since the end of the last crash.
A portion of the first sentence in the prior paragraph deserves repeating… “I simply care about the current trend.” I decided to step away from the traditional Buy & Hold approach to investing 10 years ago because I wanted to implement a strategy that reduced our clients’ investment risk while at the same time, avoiding the need to “predict” the market (since no one can). Of course, another big reason for my change in philosophy was the real-life experience of taking our clients through two of the biggest market crashes in U.S. history!
Point being, it doesn’t matter who the president is, what tariffs are signed and when, or whether Donald Trump and Kim Jong Un are having a meeting next week. The beauty of a trend following strategy is that it evaluates the absolute, most crucial piece of investing: PRICE.
Every piece of news you see on your phone, TV, or hear on the radio is already reflected in the price of the investments you own. In fact, do you want to know how to see the news that hasn’t hit the screen yet (the insider information)? It, too, is reflected in the price of the investments you own!
You see, when there is more buying enthusiasm than selling enthusiasm, price must rise. When there is more selling pressure than buying pressure, price must fall. As soon as you understand this irrefutable tenet, then you can begin to understand the fact that, when insiders legally buy or sell investments, price goes up or down based on the “reason” they’re buying or selling.
Now, sometimes insiders sell their own company stock because they have a legitimate need (i.e. – paying for their daughter’s college, buying a new home, etc.). But there is a lot of other buying and selling that still takes place ahead of news (legally and illegally, I might add) and the only way to see this is by looking at the price, trend, and direction of the investments you’re evaluating.
Now that we have all that behind us, let’s take a look at the market today:
- Yes, we just experienced the fastest > -10% drop in S&P 500 history, but it’s still just a correction, and whenever the long-term trend is up, pullbacks and corrections should be treated as “clearance sales.” So is the long-term trend up? One of the things I look for is whether the black line (price) is trading above the 200-day moving average (blue). When this is the case, it’s strong evidence that we’re in an uptrend. And then I look for a few other things, such as…
- The red line (which is a little hard to see in the chart below) is the 50-day moving average (i.e. – 50-day trend) and it’s currently above…
- …the blue line, which is the 200-day moving average (trend). When the red, 50-DMA is above the blue, 200-DMA, this is strong evidence that we are in an uptrend.
- The gray line is the 252-day moving average, which represents 1 full year (there are 252 trading days in a year). I like to look at the slope of this line, and currently it’s sloping up, which is even more evidence that we are in an uptrend.
So when you take all the information the market gives you, it’s pretty simple to determine that, based on the weight of the evidence, the trend here is decidedly up.
Now, what will happen to the market if a trade war ensues? What about a U.S. / North Korea meeting that doesn’t go so well? All this news is irrelevant when it comes to your retirement portfolio. It’s just noise and it’s goal is to consume and distract you so that you watch more news. Focus on price, trend, and the indicators that can be used with price and trend in order to determine the weight of the evidence. This is what matters