Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group
A couple of weeks ago, I discussed an overview of what a normal correction looks like and what needs to happen to prove that we are resolving the correction in the market with a break to the upside.
At the time of this writing, recovery attempts from the 200-day moving average have been a welcome sign but according to data observed by Ned Davis Research1 the market has yet to clearly establish a breadth thrust, which is evidenced by 90% or greater stocks in the NDR Multi-Cap Equity Series, rising after falling to at least 10%.2
This evidences a weak recovery and means that we are likely going to continue to move sideways in the market and potentially continue to retest lows until we develop a breadth thrust or plunge lower into new lows.
These are admittedly technical concepts that could well have you drifting off from continuing to read this commentary, so I will summarize it by saying that based on this evidence we are yet undecided on how this correction will end up resolving. As the correction progresses, there are two distinctly clear paths that might emerge in a mid-term election year.
The markets will either break out or resume their bull run or they will break down into a full-blown bear market (if not a recession). Ned Davis Research plotted those possibilities on a chart and overlaid the current case over the top of some historical averages of a 10% correction in a bull market versus the start of a bear market.
It is worth noting that this can be helpful to see in terms of possible resolutions because it can help clients with understanding their own risk tolerance and decide of what they might prefer to do to prepare for alternative outcomes.
Until the latest retest of February lows, it looked very much like the resolution was going to be more along the lines of the correction within a bull market. This is still possible, but the latest market movements have not ruled out the possibilities of a bear market.
It is unknown how long we will need to wait to discover which way we are going to go, but having a strategy for how you plan to address uncertainty is important.
Are you just going to ride the wave? Are you in a model that can potentially help lower risk within your portfolio in times of rising risk?
Deciding and sticking with your plan is key in preparing for whatever lies ahead of us. Strategies all have pros and cons, and understanding what you should expect from your accounts either way is extremely important in order to avoid becoming emotionally charged in your responses.
The positive thing for all of this is that based upon the latest global recession probability, the reading does not indicate a high probability of recession, despite increasing since the beginning of 2018.
Just like every other period of market volatility, we will navigate through this time frame and trends will develop into the next phase of the market and economic cycle.
Until we have a clear direction, careful consideration of what you plan to do and which strategies you will rely on to get you to your financial goals is crucial to your success and peace of mind.
1 U.S. Markets Amy Lubas, CFA & Chad Ellis. Ned Davis Research Advisory. March 28, 2018 [4/5/18]
2 Chart: Standard & Poor’s 500 Stock Index Chart. Ned Davis Research. Daily Data 1980-10-10 to 2018-04-04. [4/5/2018]
3 Sectors and Industries. Amy Lubas, CFA & Chad Ellis. Ned Davis Research Advisory. April 5, 2018. [4/5/18]
4 Chart: Global Recession Probability Model. Ned Davis Research. Monthly Data 2007-06-30 to 2018-03-31. [4/5/18]
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