Guilty Until Proven Innocent

I’ve received a LOT of wonderful feedback about these updates on the state of the market over the last several weeks and I wanted to thank everyone for taking the time to read them, especially our clients.  If there’s one “best” way to stay on top of what we’re doing at our office with our clients’ hard-earned retirement savings, it’s by reading these updates, as well as our videos, screencasts, podcasts, and other materials.  One of the pieces of feedback I received I won’t call negative – but I will call it constructive.  I realize that sometimes these articles can get very technical, and while I try to keep the explanations as concise and understandable as possible, I’m going to try and make today’s update as simple as possible.

You can click here to catch up on old articles you may have missed to see that my opinion on the markets has been progressively worse as time has gone by:

  • October: Short-term trends broke down, but we don’t worry about the short-term
  • November: Intermediate-term trends broke down, which resulted in taking some middle-of-the-road defensive action in our portfolios.
  • December: Long-term trends broke down, which constituted extreme defense.

Nothing has changed yet to alter the long-term picture of the market, which tells us that we’re in a decisive, long-term downtrend.  Investors who day-trade or swing-trade might have interest in stocks in this kind of environment because they implement a time frame anywhere between minutes/hours (day-traders) to days/weeks (swing-traders).  For me, however, I’d fall into the more conservative, “intermediate-to-long-term” category where I’m looking at 3-6 months and beyond as my timeframe.

So in the interest of simplicity this week, this is a chart I keep referring to without any additional indicators or overlays added to it.  What we’re looking at is the market (jagged, candlestick chart) with the red-dashed line being the average price paid by investors to get into the market since Election Day, 2016.

This line is where the mutual funds, hedge funds, pensions, and other big, institutional investors look to get in or get out because if the market is below this line, that means that the average investor has lost money since the election.  If the market is above this line, that means that the average investor is in the black.  In the interest of simplicity, I’m going to stop there, but if you want more nerdy details, shoot me an email or give me a call and I’d love to share more.  Bottom line, this is one of the many, major pieces of evidence that suggests the market is in a long-term downtrend.

The next chart is the epitome of the cliché “A picture is worth a thousand words.”  Meaning, I could literally write 1,000 words about this chart, below.  But again, since we’re keeping things simple today, you only need to know a few things to understand what this highly technical chart means, so let’s reduce it down to:

  1. The up and down arrows correspond with positive or negative crossovers in the momentum indicator in the bottom pane. The arrows just make it easier to see (on the chart) where the crossovers occur.
  2. Negative crossovers are bad (indicating a long-term downtrend is imminent).
  3. Positive crossovers are good (indicating a long-term uptrend is imminent).
  4. There have only been 5 positive crossovers in the last 25 years and all were valid.
  5. There have only been 5 negative crossovers in the last 25 years, and two were invalid “false alarms” where the market never crashed (1998 and 2015-16), two were valid and resulted in -47% and -58% crashes (2000-02 and 2007-09), and the most recent one triggered on November 30th.

That’s it… you don’t need to understand anything else.  It doesn’t take a rocket scientist to comprehend the high level of risk this suggests, so I’ll let you absorb this information and again, if you have any questions at all, please reach out.

Now that we’ve established that the stock market is in a decisively long-term downtrend, here’s a table of hugely valuable information that will help you manage your emotions as the weeks and months play out.

Humans have a short-term memory.  We also have a tendency to recall only what we want to remember (selective memory), and we also tend to look for research, articles, and information that supports our opinion.  Some of the biggest short-term “bounces” in the stock market occur during down-markets.  Said another way, some of the largest short-term swings are UP when the long-term trends are DOWN.

The table below was generated by one of my fellow market nerds on Twitter and it shows how volatile the market can be during a downtrend.  Throughout the last two market crashes, there were many times when the short-term “noise” in the market fooled investors into thinking that the crash is over…when it wasn’t.  Notice how big the up (and down) swings were throughout these crashes and remember, from top to bottom, each crash resulted in a total top-to-bottom drawdown of -58% and -47%, respectively.

You also might find it interesting that, in 2008, there were the same number up-days in the market as there were down-days, but the market ended down -37% on a calendar year basis.

Hopefully you found this week’s update on the state of the market to be simple and concise.  My stance remains extremely defensive and the market is guilty until proven innocent.”

Till next time…


Categories: Adam Koos, CFP®, CMT®, Market Commentary

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