Last week I wrote about how ripe the market is for a pullback or correction. Click here if you’d like more details on that article, but this week I wanted to present more evidence that supports that thesis.
I mentioned that the stock market experiences roughly three pullbacks per year and that a “pullback” is defined as a -5% drop in value from the most recent high.
I found the chart below on Wall Street Journal’s MarketWatch and the numbers reflect data as of October 19th. So as of today (November 3rd, 2017), it has actually been 347 trading days, which represents more than 16 months, since the last -5% pullback!
The dotted horizontal line depicts the average, at 92 days, which means that we’re currently living in a market that not only represents a rally more than three times the average – but it’s also the 4th longest rally without a single pullback since The Great Depression!
Our portfolio management strategy – the way we manage investments in our clients’ retirement accounts – is multi-faceted. One of our sub-strategies is to buy dips when the market is in a longer-term uptrend. These small, 1-2% clearance sales take place about eight times per year (i.e. – every six weeks, on average).
However, as of today, it’s been almost 12 weeks since the last good, solid dip took place. This is a stretch of time that hasn’t occurred since 2014!
A prudent investment strategy should include systematic ways of playing both offense and defense in both the short and long-term. The goal is to create market-like returns over a full market cycle with lower volatility and lower risk exposure. Keeping risk low in the short term can create an edge when pullbacks and corrections take place, and those same pullbacks can add an additional edge as a buying opportunity to deploy cash when the market is “on sale.”
Below, you can observe an indicator called the MACD (Moving Average Convergence Divergence), invented by Gerald Appel, who I had the pleasure of meeting in 2016. As he explains, MACD is a momentum indicator that has a tendency to lead ahead of price. In other words, the price (top section of the chart) tends to move with momentum (bottom section) most of the time. But when momentum diverges against price, prices have a tendency to follow and “catch up with” the direction of momentum.
Indicators, such as the one above, aren’t perfectly accurate 100% of the time. However, with probabilities on our side, using a weight-of-the evidence approach, if the market follows the direction of momentum as it so often does, then the pullback we’ve been waiting for could be right around the corner.
Since the longer-term trends in the major market indices are largely positive, a drop in price (and momentum) would give us (and you) a good opportunity to deploy cash and add stock exposure at a time that could also create an edge going forward.
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The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser and strongly consider interviewing a fee-only financial advisory firm, prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam D. Koos, CFP® and do not represent the views of TD Ameritrade Institutional and its affiliates. Investing involves risk including loss of principal