Since World War II, the stock market is historically flat through the first part of October in mid-term election years.  Typically however, the 4th quarter of these mid-term years has statistically turned a flat year into an average +7% gain in those last three months…but not this year.  That is, unless something drastically changes in the next week or two, the chances of such gains are slim-to-none.

The S&P500 is basically flat while:

  • International Emerging Markets (EEM) are down -13.75%
  • International Developed Markets (EFA) are down -12.69%
  • Commodities (DBC)are down -6.56%, and
  • Bonds (TLT) are down -6.83%

 The market is trying to find a bottom here, but remains at an inflection point, trendlessly creeping up, down, but generally sideways.  Today, the market is in the same place it was roughly a month ago, which is the same place it was roughly two months ago, and the same place it was on the first trading day of the year.  So basically, the market has done nothing but whip us around through 2 ½ corrections throughout 2018.

  1. You can see that the 50-day moving average (trend) in blue is just 1.42 points away from crossing below the longer-term 200-day moving average in red. This would not be evidence of an uptrend or healthy market, which is also why this crossover has been eloquently named “The Death Cross.”
  2. The red arrows at #2 show how the price of the market has fallen in the intermediate-term (over the last few months), but
  3. At #3, some light at the end of the tunnel is the positive momentum divergence (blue dashed line below the higher lows). Remember, price tends to follow momentum.  Not all the time, but it is a positive piece of evidence.

If you scroll down to the next chart, below, as the market falls, buyers step in at a level where they feel prices are “fair” or “cheap” (red-dashed line) and push the price of the market up until it hits the top side of the range (blue-dashed line).  Then, as the market hits this ceiling of resistance, sellers start taking profits, pushing prices back down again.  Above the blue line, there are market orders to buy if the market breaks out (and cover short positions, which would squeeze the market higher).  Below the red line, there are market orders to sell (or short the market) if prices break down.  Both situations cause a domino effect – one to the upside and one to the downside.

All grainy details aside, the market has been trading sideways in a range between 2,630 and 2,810 on the S&P500.  With the 50MA potentially crossing below a flat 200MA, along with other nerdy technical indicators throwing up red flags, we’re in “no man’s land,” which is not a time to be heavily invested in stocks.

That being said, not every “Death Cross” carves out -50% of your life savings.  Below is every death cross that has taken place since 1987 (which includes Black Monday) and as you can see, there have been 11 of them.  However, only 2-of-11 have resulted in a severe market crash causing enormous losses (2000 and 2008).  The rest were only corrections, which cause a lot of short-term pain and angst, but ultimately resolve to the upside.   The question we have to ask ourselves today is, “Is this one of the 82% of those that end quickly or one of ‘the big ones’ that result in life-altering market crashes?”

Instead of looking at the 30,000-foot view OR the short-term charts, here’s an intermediate look that sheds more positive light on the future of the market.  You can again see the positive momentum divergence in the bottom pane (vs. red lines along the lower-lows of the market in the upper-pane).  However, you can see from the trend channels I drew on the chart that the intermediate-term picture still has a slight positive bias.

If you don’t recall my update on the state of the market from two weeks ago titled “Is the Market Topping,” you can get a refresher (or a preface if you never read it) by clicking here.

I used this final chart today to follow-up on that analysis, when I went into the details and history if the following indicator… a monthly look at the market with a 10-month moving average plotted on the chart.  November 30th, the market closed back above the 10MA, which is a positive long-term sign for U.S. stocks.

I believe that retirement planning should include risk management as a cornerstone of any investment management strategy.  When I say “risk management,” what I mean is:

“A rules-based plan to reduce risk in portfolios, not by investing in bonds or other investments, but by selling investments altogether and raising cash levels as the risk profile of the market suggests that the probabilities of gains are equal to or lower than the probabilities of losses.”

As I’ve mentioned before, it’s not a trend prediction strategy – it’s a trend following strategy.  No one can predict the markets, but if the trend is flat and the market is trading below that flat trend, that is not a positive sign.  If the intermediate trend is down and the long-term trend is flat, that is not bullish.

So instead of anticipating which direction the market is going to go (never, ever a good idea!), the smarter thing to do is to sell your weakest investments and hold onto that cash so that you have some gunpowder to use when the market decides it’s going to break out again.  After all, by selling weak investments and losers, you get the tax benefits of walking away from the dogs while holding high-quality cash to invest in some top-ranked winners.

But as long as we’re bouncing around like a pinball within this range, neutral and conservative is our game plan for now.

Till next time…

Adam