OMG the Market Is About to Crater!


Don’t believe it as so, regardless of what the talking heads on the radio and TV try to make you believe.  There is still some time (in this, one of the longest bull markets in history) to run and buy some stocks or options – but not today.

Here’s a One Minute Graph of the S&P 500 today at 11:38 AM Eastern Time:

SPX Today at 1136 am 10.08.2018
Data Source: Vectorvest

The orange Horizontal line shows where the S&P closed on Friday.  The Vertical Orange Line shows where the S&P was as of the time I took the snapshot.  As you can see the S&P was in positive territory for a short period of time between 10:11 and 10:35 but that was a very short period of time.

Does this one minute chart tell us anything?  Nothing other than today my not be a good day for buying stocks – unless you can find some going against the trend and actually heading up.  Currently out of the 8,060 stocks tracked by Vectorvest.com 2,377 have advanced in price, 4,652 have declined in price, and 1,029 have remained unchanged today.  Vectorvest only rates 597 stocks as BUY stocks and 1,768 as SELL stocks with the remaining 5,694 rated as a HOLD.  This gives us a buy to sell ratio today of only 0.34:1.  Ideally you would want this to be 1:1 or better to consider yourself a prudent investor.

While Vectorvest suggest we are in a confirmed down market … that does not equate to a BEAR market.  It is simply a correction period.  Corrections are healthy to maintaining Bull Markets.  However, it is a time when you may want to tighten stop loss orders or buy options to protect what you have … but not necessarily a time to “Run from the Market” by selling everything you own.  Vectorvest is a company I’ve grown to trust over the years.  According to them, in their most recent essay … October is just being October.

People tend to fear October because of what happened in October 2007 and October 1987 and October 1929 (a depression in 1929 and two major recessions followed by short-lived BEAR markets in 1987 and 2007).  In this post on Investopedia.com

https://www.investopedia.com/articles/financial-theory/09/october-effect.asp

it talks about why people fear October.  However, it also states this …

“Surprisingly, October has historically heralded the end of more bear markets than the beginning. The fact that it is viewed negatively may actually make it one of the better buying opportunities for contrarians. Slides in 1987, 1990, 2001 and 2002 turned around in October and began long-term rallies. In particular, Black Monday 1987 was one of the great buying opportunities of the last 50 years. Peter Lynch, among others, took this opportunity to load up on solid companies that he’d missed on their way up. When the market recovered, many of these stocks shot up to their previous valuations and a select few went far beyond.”

Now let’s talk about BEAR vs BULL Markets for a minute.  Most people feel they are equal in time since the market does have cycles, but this is far from true.  Currently this BULL market we are in (BULL is a market going up and BEAR is a market that has fallen by at least 20% from it’s high and is trending down) has lasted for almost 10 years … making it one the longest BULL markets in American History (though not the longest).  But, I believe it still has some time to run.

The chart below shows the BULL and BEAR markets between 1903 and 2016.  We are still in the last BULL market that started in March 2009 and on this chart shows 7.8 years of a run (now 9.8 years).  There were longer BULL Runs that the talking heads on CNBC and FOX Business News tends to forget.  You will see these below as well.

Bull Bear Markets
Data Source: Robert Shiller’s data library. Calculations by Newfound Research.

Notice there have been 12 BULL markets since 1903 and 11 BEAR markets.  So the number of BULL to BEARS is pretty darn close … BUT, take a look at the amount of time each lasted.

The longest BEAR market (the Great Depression) lasted 2.8 years with the second longest (the Tech Bubble Bursting) lasting 2.5 years.  The Great Depression was from 1929 – 1933 while the Tech Bubble Bursting was from 2000-2003 (But we also had the terror attack on the World Trade Center in 2001 that I believe prolonged this one).  You need to also study the returns of these BULL and BEAR Markets.

During the Great Depression the market lost 82% of it’s value.  During the Tech Bubble the market lost 42% of it’s value and during the latest BEAR Market (the Great Recession of 2007 – 2009) the market lost 49% of it’s value – as measured by the S&P 500 Index.

I remember the crash of 1987 like it was yesterday.  I’d thought everything I’d been taught about the market at that time was “out the window with the baby and the bath water” and the total time was only about 3 or 4 months with a total loss of only 26% of market value.  I wished I’d had the money and been as smart as Peter Lynch back then.  Like everyone else, I sold what little I had in mutual funds and set on the sidelines way too long.

Of course the ORANGE in the above graph represents the BEAR Markets.  Now study the BLUE.

We’ve had 4 Bull Markets that lasted longer than 12 years.  The longest was 14.6 years between 1946 and 1960 with total returns on 913%.  The arithmetic average return for all the BULL Markets comes in at 387% (not including the last two years of the latest BULL run and just averaging the total returns shown on the chart).  The arithmetic average loss for all the BEAR Markets shown on the chart comes in at -35%.  So, it can also be said that on average a BULL Market will return more than 10 times what a BEAR Market can lose you.

Why do American Investors FEAR the BEAR so much?  These are facts, folks.  The average BEAR Market lasted 1.45 years over this period of 113 years.  The average BULL Market lasted 8.1 years over this period of 113 years.  For years (especially those after I learned my lesson in 1987) I’ve been telling my clients that the market goes up 75% of the time and down 25% of the time.  This kind of proves that point.  Over this 113 year period of time the market was consider a BULL market for 97 of those years and a BEAR market for only 16 of those years.  97 divided by 113 = 74.6% (I’d say I was pretty close by telling my clients this).

How much longer can the BULL Market Run?

I believe stocks are driven up and down my three logical forces and two emotional forces.  Logical forces are Corporate Earnings, Interest rates and Inflation.  Emotional forces are FEAR and GREED.

When more investors are fearful that those that are greedy … the market can trend down.  When more are greedy than are fearful … the market can trend up.  It is the logical forces that cause this fear and greed to kick in.  When Corporate Earnings are trending up – if Interest rates and inflation are kept in check – the market will trend up and investors get more greedy.  When corporate earning are trending down and interest rates and inflation are not kept in check the market can trend down and investors grow more fearful and selling overtakes buying.

Look at the S&P 500 price as it relates to the S&P 500 price in the chart below:

The earnings chart
Data Source:  Vectorvest

This chart clearly shows that as long as corporations in the S&P 500 have increasing earnings the stock prices should also increase.  When earnings drop, so do the prices of the stocks.

Now on the next chart we look at the same 10 year period but focus on rising S&P index as compared to the CPI (the way the government measures inflation) and the triple A bond interest rate.

market climate 2
Data Source:  Vectorvest

Again, we see that Inflation has been held in check (between 2 and 4 percent) during this BULL run since 2009 and interest rates have been relatively low (less than 4% for AAA Bonds) during this period.

If the FED goes crazy, they could pull us into a BEAR Market – but I just don’t think that is going to happen over the next few years.  I still believe this downturn over the past few days is nothing more than a minor correction that will soon work its way back up.

In this last chart we see a six month look back at the S&P 500 Index.

SP 500 6 months

 

Here we see the first level of support (Dark Teal Line) at 2,769 and the next level of support at 2,684.  As of this screen shot the S&P was trading at 2,867.

Should you buy stocks knowing the market could fall another 90 to 180 points.  No!  However, there is no harm in putting together a shopping list of stocks that you may want to consider when the market starts heading back up.  When will that be?

You have two choices based on this chart.  (A) when the price of the S&P 500 is above the 30 day weighted moving average (orange line) or (B) when the 5 day weighted moving average (Blue Line) crosses above the 30 day weighted moving average (Orange Line).

Bottom Line:  I expect pullbacks along the way … but I also expect the markets to end higher at the end of the year than where they are today.

Good Luck,  and remember … Luck is when “Preparation meets Opportunity.”

Jerry

 

2 thoughts on “OMG the Market Is About to Crater!

    1. Jim …
      Thanks for your comments. I know you are a seller of these annuities and have found a good market niche for yourself. However, you know me well enough to know that I really don’t like annuities. You also know me well enough to know that I like a challenge. Therefore I am going to learn all I can about Indexed Annuities and you can believe I will be writing a blog about them in the near future.

      Keep Reading Lil Man!

      Big Bubba!

      Like

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