Retirement Planning-Who’s On Your Side?

Money managers who are always doom & gloom love to make you feel stupid when the market goes down and you didn’t sell at the perfect time.  Others like to make you feel stupid when you’re out of the market and it goes up.  Some of your friends might like to tell you how well their portfolio is doing in an environment like this – my guess is, to make you think they’re as smart as they think they are – but in reality, they’re putting more into their retirement account than it’s losing, so it just looks better than it really is.  The bottom line is, none of these people are on your side!

There are two, main facets to retirement planning:

  1. The plan itself, which is by far, the first and most important facet, and
  2. The portfolio management required to implement the plan.

Without a plan, unless you’re ridiculously wealthy, ridiculously frugal, or both… no one really knows for sure whether they can retire, or stay retired!

Investing your hard-earned retirement dollars without a plan is simply “Investing and hoping for the best.”  I say this all the time, but “hope” is not a strategy.  When the markets get turbulent, the first thing you should do is look at your retirement plan.

“Oh, I logged into my account online and I see that I’ve lost some money this past quarter.”

Nooooo!  I didn’t say look at your account online – I said look at your retirement plan!

How in the world are you ever going to know if any setback in the market is temporary – or a catastrophic blow to your retirement plan – if you don’t have a (or look at your) retirement plan?  When you’re driving on a 1,500-mile trip, are you following a map/GPS system or are you staring at your odometer?!  Ever run into traffic?  Have to stop for gas?  It happens, right?

Well, the same kinds of things happen along your retirement travels.  The key is to determine whether or not the issue is one that’s temporary or catastrophic.

If every marathon runner quit the race when they became fatigued or experienced a stomach cramp, I don’t think there would be too many runners finishing races these days.  Runners slow down, get a drink of water, take a restroom break even… but they don’t quit because the going gets tough!  They have a plan on getting from the starting line to the finish line, they expect pain and setbacks, but they continue pushing through.

Tired?  Cramping?  Feet hurt?  Keep going!

Your foot might be broken?  Yeah… stop.  Definitely stop!

One problem with retirement planning:  There is no “training” per se.  No one is really prepared for the volatility of the markets until they experience it for the first time.  Then, when you retire, watching fluctuations in your investment portfolio just becomes more difficult now that you’re no longer earning income and you have all this time on your hands to listen/watch the news and login to your account online on a weekly or worse, daily basis.

There have been several market pullbacks and corrections over the course of the last 10 years, all of which turned out to be mere cramps and fatigue.  However, in 2015-16, 2011, and for a brief moment in 2010, the trends in the market definitely looked broken – and I believe the same is the case today as it was in those three time-frames.

The market is “broken” and in a downtrend until it’s not.  If you know that 80% of stocks move with the trend, then you’re smart not to fight it and instead head to safety.

Here’s the market today:

  • It fell almost -20% between Sept 21st and Dec 24th.
  • Momentum (in the bottom-pane) has fallen into bearish (negative) territory twice over that same time period.
  • We’ve seen a snap-back rally since then, which was expected.
  • The previous “floor” of support which goes back to Feb/April of 2018 is now a “ceiling” of resistance above which sellers are likely going to take profits, putting downside pressure on the market in the near-term.
  • The “high whipsaw risk” area between the Feb/Apr lows and the Oct/Nov lows are explained in more detail on the next chart, but a “whipsaw” is when you buy high, thinking the trend has reversed, only to have to sell lower again. Hence, extreme caution should be exercised here and we definitely shouldn’t be throwing all our money into the stock market just because we clear that first “ceiling” of resistance.

One of the reasons why I feel the above “pocket” of caution creates such a high risk of whipsaw is because of the chart below.  The red, dashed line represents the ceiling of resistance marked by the Feb/Apr lows of 2018.  But the other line represents the average price paid for the S&P500 since election day (this indicator is called the Anchored Volume Weighted Average Price – or A-VWAP for short – and was made popular by Brian Shannon of Alpha Trends).

The reason this line is so significant is because the VWAP is a place where the big, smart money plays.  Huge institutions, pension funds, and mutual funds watch these levels.  If investors try to throw money into the market when we’re below the A-VWAP from the Election lows, I think risk levels are extremely high.  I’m not saying that it’s impossible for the market to continue higher from there (if it did, then I’d adjust my scenarios).  All I’m saying is that the probabilities favor a high level of risk, frustration, and disappointment inside that level.

I take a weight-of-the-evidence approach to investing, so I’m always coming up with scenarios that are likely to play out, but one should never have an opinion to any particular scenario.  Opinions turn into biases, which cause investors to become “married” to their opinion, which results in making poor decisions in order to satisfy the ego.  That being said, we always want to look at both sides of the coin.

First, here’s a possible positive scenario, where sellers step in, take profits, and push prices back down again, but the lows from December 24th hold and the market heads higher.  If this scenario plays out, I would start getting back into the market as the trend reversal takes place and a new, positive trend is confirmed.

Here’s a possible negative scenario, where sellers step in, take profits, and push prices back down again, but the lows from December 24th do not hold, more sellers enter the market, and prices head even lower.  If this scenario takes place, things are simpler because all we have to do is remain defensive and be patient.  I’m also looking for possible growth in investment such as oil, gold, silver, bonds, and foreign currencies if this scenario plays out, below.

Some might be thinking, “What if the market just keeps going straight up from here?” and that’s a valid question.

The thing is, unless there is a big news event (like BREXIT a couple years ago, or the “flash crash” in spring of 2010), markets rarely recover in a “V-bottom.”  Even Black Monday resulted in a re-test of the low that occurred on that unprecedented day in the market (see the double-bottom below, followed by a break above the “ceiling” of resistance marked by the Oct/Nov highs).

Here’s the market in 2011 through the U.S. Treasury downgrade.  Again, the market bottoms, buyers step in pushing prices higher, sellers jump in and push prices lower again, then the low is re-tested, we see a positive momentum divergence (blue, dashed line in the lower-pane) which suggests higher prices are likely, then the previous “floor” of support that is now a “ceiling” of resistance is broken (red, dashed line), and the market heads to new highs (also, notice at the far right edge of the chart, that in 2012, the market re-tested that same “floor” of support again before heading higher).

In the last 20+ years, there have been four times when the market has experienced a hard and fast correction that turned out to be a temporary setback before prices headed higher (1998, 2010, 2011, and 2015-16).  There have been two times when a mere setback turned into a catastrophic crash (2000-02 and 2007-09).

The average crash occurs every seven years on average (with an average drop of roughly -42%) and it’s been almost 10 years since the last “big one.”  So, with every correction since 2009 that ultimately resolves to the upside and turns out to be a temporary setback, the metaphorical rubber band continues to stretch further until it cannot stretch any longer.

Case in point, below is the market between 2007-09.  See the double-bottom re-test and the “floor” of support that gets broken in late-2007?  That “floor” becomes a new “ceiling”, which is tested a couple times and the market even manages to break out above it in May of 2008… but it turns out to be a head-fake and the market instead heads lower.  See the “floor” of support and double-bottom re-test in Jan/Mar of 2008?  See how it breaks that floor in July, tries to re-claim that level in August and September?  There just wasn’t enough buying enthusiasm to send the market higher – no bueno.

I know that’s a lot – and this stuff isn’t easy.  If it were, everyone would be doing it and I’d be bored.  The analysis, weighing risk vs. reward, building a weight-of-the-evidence approach to the market on any given day, and implementing retirement plans and investment management based on that evidence is the fun part… at least for me.

The market will never get simpler.  It’ll never go up or down in a straight line.  Corrections look easy to handle, emotionally, when observed on an old chart from years ago, but living through times like these is another, completely different feeling.

We remain in a defensive stance until the market continues to show more evidence that suggests a positive or negative scenario is playing out.  I don’t have a prediction because no one can predict what the market will do tomorrow, next week, next month, or throughout the rest of 2019.  But I do know that the intermediate and long-term trends are decisively down at the current time, and again, fighting the trend is a painful, losing battle.

Till next time…



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

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