Insights & Advice

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Down but not out

The stock market is down 10% over the last nine days from peak to trough. That kind of move can rattle investors and trigger a bearish psychology that can play havoc with your emotions. It’s time to keep this market in perspective.

The number one thing to remember is that we are experiencing a long-overdue correction after a historically huge rally. It is not a return to the lows of 2008-2009 nor is it a a bear market. If my own forecast is correct, we can expect an overall decline of 22-23% from the year’s high of 1,219 on the S&P 500 Index. That would take us down to 940-950 on the S& P 500. So far we have dropped 16.5%, so we can expect more declines ahead.

“How long will this take?” asked a reader from Richmond, who confessed to feeling quite a bit of stress over this pullback.

This pull back has already overstayed its visit according to historical data. The average correction occurs over 54 days in bull markets (of which this is one). This pull back is already 67 days old and will probably last a bit longer. The high volatility, low volume and computer/flash trading, which makes up over 70% of the market volume, is prolonging this sell- off. For those of you who follow the ups and downs of this market correction, you know that on any given day markets can be up or down 1-2% on no news. Those up days delay the final resolution of this pullback. It is far easier emotionally to weather a short, sharp correction rather than one like this that plays your emotions like guitar strings.

Last week I mentioned that several markets had experienced a “Death Cross”, a technical term for when a market’s 50 day moving average (DMA) crosses below its 200 day moving average. Since then a number of media outlets have jumped on Death Crosses as if they are the answer to where the markets are going. The S&P 500 Index, my benchmark of choice, appears to be setting up for just such an occurrence very shortly. As I wrote last week, a Death Cross by itself does not instantly spell doom and gloom for the markets, but it is bearish.

However, these downward crosses can just as easily be followed by the opposite, a “Golden Cross,” when the 50 DMA crosses above the 200 DMA. There have been almost as many examples of markets reversing a downtrend shortly after a Death Cross is made as there are the opposite, more bearish interpretation. So take any predictions based on these Death Crosses with a grain of salt.

As the markets continue to decline, be prepared for a growing and highly voracious chorus of doomsayers to outdo one another in dire predictions of further declines. This happens every time the markets go into a correction mode. By the time we get to my target levels, I expect that most perma bears will roar to life, confidently predicting a second recession, a return to the 2009 lows and beyond, that the sky is falling and 666 (the level at which the S&P bottomed in March of 2009) was really the sign of the devil and as such the rally to 1,219 was doomed from the start. I’m just kidding on that last point.

I say ignore them. A sure sign of a market bottom is when you start to hear that kind of claptrap. I will be watching the markets closely when we reach my 940-950 target on the S&P 500. Barring any additional new information, I fully expect to start investing at that level. If things change, you will be the first to know. Until then, try and ignore the markets and have a great Fourth of July.

Posted in A Few Dollars More, At the Market