Trump announced overnight that he wants another $100 billion in tariffs on China in order to counter the tariffs they levied against us because of the tariffs we put on them. Whew… still with me? I’m going to give you my opinion on where I think the market could go from here in a few paragraphs, but I think we first need a refresher on a few lessons when it comes to investing.
There are a LOT of lessons one must learn in order to be a successful investor, but for today, we’ll stick to just five. There are a few things that have no place in your retirement portfolio:
- What you hear on the radio,
- What you watch on the news,
- The things you read online,
- Anything that elicits emotions such as “excitement,” and of course,
- Political opinions.
We can’t avoid the simple fact that the market does react to politics and news, but what we can do is focus on the horizon and not our feet.
Have you seen crosswalks that look like the one in the image below? This is the new thing in Honolulu, where it’s not illegal to cross the street while texting on the phone. Granted, getting hit by a car and dying is the risk you take when crossing the street and paying too much attention to what’s in front of your face. Less dramatic, but similar still is the risk you create in your very own investment portfolio by simply focusing too much on what’s happening right now, in front of your face.
A small handful of you might be thinking, “Oh, here we go – another financial professional trying to get me to ignore my portfolio. I’ve done that before and look where it got me. I need to pay attention and nothing is going to change that.”
Good! Pay attention! I want you to pay attention – but to the right things. The problem is, so many investors who have been burned in market crashes like 1972-74, Black Monday, the Dot-Com bubble, the Mortgage Crisis and “Great Recession…” some of these investors are so scarred (not to mention, scared), that they’ve gone from one extreme (paying no attention whatsoever) to paying such close attention, they can’t see the forest for the trees.
If you are standing on a hill, looking down at your feet, would you be able to tell you’re on a hill? But what if you looked up and ahead – or behind you. What if you stepped back a bit (or more than a bit, for that matter), could you then see which way the hill was sloping on which side? I think you could, but too many people spend so much time staring at their feet (i.e. – what the news says today, what the market has done this last month or two), their perspective is all out of whack.
So, here’s what I think is going on. Let’s start with the Dow, using the numbers annotated in the chart below:
- We’ve seen lower-lows in the Dow Jones Industrial Average (DJIA), but
- We’ve seen momentum increasing, which is called “positive divergence” and is a good piece of evidence that lends itself to a potential positive outcome
- In order to keep this picture bullish and positive, we could see another slight drop and then a breakout from the downtrend.
Now let’s look at the S&P 500. Here’s a chart I updated for Friday, but I posted something very similar on Twitter, Facebook, and LinkedIN yesterday. Just look at the numbers in the chart below, which correspond with the following notes/numbers. We also have positive momentum divergence in the S&P 500 as well, so I think this goes one of two ways. We either:
- See a slight drop that holds above the horizontal black line (floor of “support”) and then a breakout to the topside. I think this scenario is more likely, or
- We breakdown below support, “shaking out” a lot of anxious investors, after which smart money buyers jump in and take advantage of the sale prices, pushing the market back up into the Descending Triangle pattern, after which we’d see a little consolidation before it ultimately breaks out to the topside anyhow… just a little later.
Last one. This is technically a chart and an indicator. The top pane is the New York Stock Exchange (NYSE) composite – so all the stocks (and bonds) on the NYSE. The lower pane is a chart that plots the total number of advancing (increasing) stocks vs. the total number of stocks declining in value. What we can observe is clear… while the NYSE has created a lower-low in price, we’re seeing more stocks participating in the uptrend, which again, is a good thing (i.e. – bullish/positive for the market).
This is how I see the market today, based on analysis I’ve performed up to this point (at 12:01am on Friday, April 6th). One of the many crucial laws of investing is to keep an open mind. Another is to admit when you were wrong and know your risk levels. For me, if these momentum divergences dry up and head downward, if the market continues down below the support lines I’ve drawn above, and if we start to see more decliners than advancing stocks, I’m going to quickly change my opinion and start taking conservative measures to brace for what could be something worse on the horizon.
When I watch the markets for signs of an imminent crash, I’m looking at several indicators and trends (and the above charts are just a few of them). The bottom line is, while we’ve certainly experienced a correction this year, it was well overdue and thus, a normal, healthy part of the market cycle. Stocks can’t go up indefinitely without any breathers along the way! We just became so accustomed to things being that way in 2017 that it seems much worse than it actually is.
Think of it this way. You’re on a long drive across the country. The speed limit is 70 and you’ve got the car on cruise at 74 MPH. For a big, long stretch of your trip, there is no traffic, an empty highway for the most part, no construction to speak of, and beautiful, sunny skies. All of a sudden, after hours of perfection, it starts to rain and traffic starts to slow. Do you pull off the road and pitch a tent for the night? No! But you might slow down a little.
And that’s all I’m suggesting. When the skies are clear and there’s nothing at all to fear, it’s okay to keep our foot on the gas. But when it starts to rain a little bit and traffic becomes a little congested, it’s okay to slow down a little and exercise some caution.
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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.