In Part I and Part II I laid out my own personal expectation that a bear market of some significance may well occur between the end of 2019 and the middle of 2022. Then of course, it all seemed to happen in a week. Now the reality is that I certainly did not “call the top”. In the articles linked above I identified the “current trend of the market” as “bullish”, which was technically correct.
Let explain my own personal “Big Picture, incredibly rudimentary” method for designating the current trend of the stock market as bullish or bearish. In no particular order:
*Was last month’s closing price for the S&P 500 Index above its 10-month moving average? (As of 2/28/2020 = NO)
*Are at least 2 of the following indexes – Dow Industrials, S&P 500, Nasdaq 100, Russell 2000 – above their respective 200-day moving averages? (As of 9:40 CST on 3/4/2020 = YES, the S&P 500 and the Nasdaq 100)
*Is the current month November through May? (YES)
*As explained in this article, has the S&P 500 Index NOT gone 3 months without making a new high, then taken out the low of the intervening 3 months? (YES)
If:
*3 or 4 of these are bullish, then I am bullish
*2 are bullish, I typically give the bullish case the benefit of the doubt
*If only 1 is bullish I raise some cash
*If 0 are bullish we are in a bear market and I play some serious defense
As I write, 3 of the 4 still qualify as “bullish” (the S&P 500 Index did close February below its 10-month average, so that one is now bearish), so – despite the hysterics of the last week of February – I have no choice but to call myself “bullish.”
Also, on the plus side, a ton of market indicators reached vastly oversold levels during the selloff (see here for one example). This in no way guarantees a rebound nor an immediate resumption of the uptrend, but it is a hopeful sign.
If history is a guide:
*We will likely see a lot of volatility in the weeks ahead – big up days and optimistic headlines, followed by another plunge and more apocalyptic prognostications
*The market should work itself higher in the months ahead following the massive oversold readings I just mentioned
So, the good news is that long-term investors may be OK just sitting tight for now. The bad news is that I still think there is more potential trouble waiting “down the road.” And I urge investors to be vigilant and NOT to adopt the “I am just going to ride it out no matter what” mentality.
What to Do Now
Its probably OK to “exhale” a little bit after last week, but DO NOT get complacent.
Keep an eye on the four trend-following indicators I mentioned above. If and when the market truly starts to “roll over” it will – in my opinion – absolutely, positively be time to “play some defense”.
A little more on why I remain vigilant (much of which is detailed here and here):
*Valuation levels remain high – which means there is still plenty of downside risk
*The decennial “Early Lull” remains a concern (the first 2.5 years of decades starting with a presidential election have seen the Dow lose ground 6 times in row, with an average loss in the -14% range)
*While I think Coronavirus fear is insanely overhyped, it is too soon to say for sure that it won’t have a significant impact on the worldwide economy
*Lastly, one thing I have not mentioned before is the dearth of available cash. See Figures 1 and 2 from www.sentmentrader.com
Figure 1 – Cash allocations across investor groups (as of 2/5/2020) (Courtesy Sentimentrader.com)
Figure 2 – Average Cash Allocation % Among Investor Groups (as of 2/5/2020) (Courtesy Sentimentrader.com)
These numbers may have jumped a little bit during the recent selloff, but not likely substantially so. Bottom line: there is not a ton of “buying power” sitting around to propel the stock market indefinitely higher.
Summary
Repeating from previous articles:
*Keep your head screwed on straight
*Regarding pandemics and stock markets, adopt a “hope for the best, prepare for the worst mentality”
*If you believe you are overexposed in the market then make a plan for when and what and how much you should sell. Then follow your plan and DO NOT look back in regret
*If you want to put your head in the sand and just hold on forever, fight that urge (the time will come to NOT “ride it out”)
*If you have cash to invest – don’t try to be a hero, but don’t be a total wimp either
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
Thanks for sharing your knowledge, Jay.
Curious if you backtested your “Big Picture, incredibly rudimentary” rules?