The week of February 5th saw a sudden rise in volatility and a 10% decline in prices from the all-time high on January 26th. This sudden shift in market behavior caught many off guard. Well, of course it did! Everyone had grown accustomed to fourteen months of calm. And the moment things started to shake a little, people freaked out. Why? Because they don’t have a process or method to differentiate between a correction and the start of a bear market.
Let me calm your nerves and reinforce the point that this was nothing more than a very long overdue market correction in response to an overbought condition. It is a very normal thing to happen-problem is we hadn’t had one since before the November 2016 elections, causing people to become complacent. At Lifelong we don’t get complacent and there’s a multi-faceted process in place to guide us. It incorporates price, volume, volatility, supply, demand, breadth, implied volatility premiums/discounts, consensus positioning, advance decline lines, risk spreads, economic data and more. It’s a lot, trust me. What we do is measure and record all of it every trading day and then draw our conclusions from what all these signals are telling us. We don’t make decisions by how we feel, or how the market feels, or by how anyone in the financial media feels. Instead, we are guided this very extensive process.
All of the above has been a work in progress for the last eighteen years and will continue to be for the rest of my life. I do have outside help because there is NO WAY a single firm has the vision or ability to do it all themselves. In my constant pursuit to improve, I have been fortunate to identify what I believe to be the most valuable research available and have blended it together to make it my own. The result is that since 2000 I have not been on the wrong side of a bear market and I don’t expect to be ever again. Avoiding bear markets, is how you protect the profits you made during the bull market. Taken a step further, our goal is to actually make some money during a bear market too. We did it during the financial crisis of 2008 and again in late 2015-early 2016. Now please don’t misunderstand me; I’m not saying this because of ego, rather I’m trying to instill in you a sense of confidence and the understanding that I take all of this VERY seriously and that I view all of my clients as extended family. I care about what happens and I want us all to win!
So why am I saying this is a normal correction and not the start of a bear market? To begin with we work off of probabilities and the fact is bear markets don’t just show up out of nowhere. They are characterized by a multi-month period of deterioration beneath the surface that multiple factors in the process begin to detect. During this topping process large cap stocks such as the Dow 30 and S&P 500 continue to rise to new all-time highs while the deterioration beneath the surface intensifies. Once this historical pattern is underway, our trading process dictates that we systematically exit stocks as these two major indexes achieve new all-time highs. The goal is to be almost completely out of stocks by the time the end comes. At the January 26th all-time high, NONE of the historical early warning signs were present. In fact, it was the opposite there were only signs of increasing long-term market strength.
Also, the market action on Friday, February 9th provided a preliminary signal that leads us to believe there is a very good chance this correction is close to being done. This doesn’t mean we immediately scoot back to the highs of January 26th, just that we may be very close to the end of the correction.
After thirty years as a financial professional, I can say one thing with absolute certainty—there is no certainty in markets. Instead, as mentioned above, we measure and record what the market tells us every single day in search of the most probable outcomes.
If you have a dynamic and data dependent process like mine then your views should change the second one or more of the signals in the process changes. At the moment, I can only conclude that a bear market is nowhere in sight.
In summary, corrections during a bull market are totally normal. The problem is that there is absolutely no way to know in advance if they will be shallow or deep. Until last week we had fourteen months of shallow corrections. Bear markets, on the other hand, are visible for those with a process that is always looking for them. So with no early warning signs of a major market top prior to last week’s decline, the probabilities are that this was a short-term correction in an ongoing bull market.
One last point, please do yourself a tremendous favor and ignore all the blabbing in the media. This includes the print media too. All it does is cause fear and panic and impairs your ability to make rational decisions. If you allow that to happen costly mistakes are made. Understand, that it’s all talk with absolutely no process behind it. Remember too, that the goal of the media is to attract eyeballs; the more they attract the better their ratings. And that’s all they care about.
If you’d like to schedule a conversation about how my process is:
- A) Different from the typical financial advisor
- B) How it can be applied to your IRA/401k retirement money, please feel free to call me at 914-761-3237.