Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group
Fear is a powerful thing.
When geopolitical risks arise, markets tend to almost predictably recoil as if a poltergeist appeared manifesting every one of their deepest darkest fears. When things are going smoothly, markets become very optimistic, but then some spook shows up and we find out who we really are. Panic is never a good thing for any of us. Therefore, it is imperative to understand the facts, look at the big picture, and remain rational. If only that were easy!
No matter how often we entreat ourselves to remain rational and objective, fear has a way of sneaking past our guards. Perhaps that is one of the uniquely human things that we all need to be aware of when things get hard.
One thing that we must understand is that the market has been in a corrective wave since the end of January. The difference between a market correction and a market top is what happens after the correction happens. If the market resumes the move up, it is a correction. If a new downward trend develops, we enter a bear market. During the initial period it is difficult to discern. Bear markets rarely develop on the backdrop of improving economics. However, corrections do occur in times of economic growth.
It is very likely that, as I write this (Friday morning), we are looking at a potential retest of 200 day moving averages. The 200-day moving average is really a super smoothed out curve that we sometimes wish was the stock market, but really is only good at exposing the longer-term trend.
Some of the things we are watching very closely:
- Can the S&P 500 remain above the 200-day moving average?
- If strong support remains intact, does the recovery have broad participation? The move off the February 8 lows lacked broad enough participation to warrant declaring that the corrective phase was behind us.
- Can we make a higher high or new high on the S&P 500? This means we wouldn’t want to drop below 2598.10 on the S&P 500 and we want to get back to closing above 2872.87 or at the very least the high of March 9th of 2786.57.
Dropping below the 200-day moving average is where we really must pause and wonder if the greater trend of the move is ending. It is possible to break below the 200-day moving average and still not enter a bear market (where losses can get heavy). However, dropping below that point can mean that the market movement is really at risk. Here is a picture of where we are now to give you visual aid.
It is also important to remember the last commentary about volatility and the likelihood of this happening in an extremely politically charged mid-term election year. This is just validation of that fact.
What to do at this point?
Be honest about your objectives and remember why you are invested in the first place. The days seem long, and the years can seem short. Strategies must be in place to help you navigate to the longer-term day by day. This means remaining un-emotional when fear knocks at the door.
The blessing of running a model is that models never panic. They simply tell you what they are designed to tell you. People panic and often that is to their own detriment. Having a strategy that does not panic but at the same time is effective in managing risk in a reliable manner is just plain smart. Headlines get frightening, but data never lies. Leave the lies to media and politicians. Your investments don’t need their help.
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