Some of my favorite phone calls are the ones we get from clients who call and say, “What do you think about the market and how things are going right now? Do you think this is the next crash?” Then they follow that statement up with a nervous chuckle, followed by, “Well, I’m sure you’re getting a lot of these types of phone calls.” The truth is, as the market has pulled back this past few weeks, we’ve only received three calls thus far… and this is good! It tells me that we’re doing a decent job educating our clients on what to – and what not to be worried about. But what IS going on in the market right now? Is this the beginning of the next market crash?
First off, let’s put things into perspective. Analysts can argue about when this last bull market began, but I think it’s fair to say that most look at a long-term chart of the S&P500 and say that the last crash ended in March of 2009. With that behind us, I took a look at how many “significant” pullbacks and corrections have occurred. Then, I plotted them on the chart below, along with the rose-highlighted areas, when “red flags” started going up, indicating that a market crash was a high probability.
Here are some observations:
- The market has experienced this “significant” pullbacks or corrections at least 18 times since the bottom of the 2007-09 crash.
- There were cautionary signs of a market crash in 2010, but it was short-lived.
- 2011 produced more “red flags” than 2010, but
- Nothing compared to 2015-16 in terms of risk when it comes to probabilities of a possible market crash.
All in all, the market has had three time periods where I’d characterize it “at risk of a crash” with the longest and worst being 2015-16. Otherwise, most of the time, pullbacks and corrections were all opportunities for buying at lower prices. Think of it as catching the market “on sale.”
Of course, we only want to be buying these metaphorical “clearance sales” if the market is in a long-term uptrend. So, I thought I’d share my short-term observations as well as the important levels on my radar:
- Looking at the chart below, we want the market to get back above, and then stay above the 2,780 level for starters. Even if it goes sideways for a bit, the 2,780 level is the first level of support/resistance when I look at this chart.
- If the market re-tests the low from last Thursday and falls below 2,720, we want 2,700 to hold, which is a floor of support going back to late-spring/early-summer.
- If the market falls convincingly thru that floor of support, it’s time to start taking cautionary measures, and
- If the S&P500 breaks thru the final level of support, which lies at the same point where it bottomed twice in February and April this year, then it’s time to start dialing down the risk and bracing for a possible crash.
However… and this is crucially important! We are not in a bear market and we should not treat our portfolios as if we are! Said another way, just because there are risk levels in the sand (that have not yet triggered, mind you) does not mean you should try to anticipate the market hitting these levels before it has.
Right now, as far as the long-term picture goes, we’re still in a long-term bull market. Today’s markets look better than they did in 2015-16 and still look better than they did in 2011 or 2010 during those corrections.
The market is in an uptrend until it’s not. Innocent until proven guilty.
We want to ultimately get back above the blue, dashed line in the chart above, which represents the Sept 20th all-time-highs, and would also solidly put us back into an uptrend on all major timeframes.
Meanwhile, let me leave you with the facts:
October is historically a volatile month, but the final two months of the year, especially in mid-term election years, are typically positive… and again, the market is still in a long-term uptrend. This should be treated as the last 18+ pullbacks and corrections within a long-term bull market – as a clearance sale, not a time to sit on the sidelines.
Till next time…
* Adam Koos, CFP® is a CERTIFIED FINANCIAL PLANNERTM Professional, as well as president and portfolio manager at Libertas Wealth Management Group, Inc., a Fee-Only Registered Investment Advisory (RIA) firm, located in Columbus, Ohio.
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.