If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Even if it technically is not a duck – yet.
The S&P 500 has not fallen 20% yet, so technically the current market correction can’t be defined as a bear market. However, market risk is exceptionally high and this correction does absolutely have all the hallmarks of a bear market.
What Are Those Hallmarks?
Stock Market Price Charts
I keep charts of previous bear markets saved with my other charts. The reason that I do this is that I want to constantly be reminded of how bear markets behave. When I look at price charts of past bear markets there are certain characteristics that are common such as:
- Price is below the 200-day moving average (DMA) and that average acts as resistance.
- The 200 DMA is trending down.
- The 50 DMA is trending down below the 200 DMA.
- Price makes a series of lower-highs and lower-lows.
- Price consistently retreats at major resistance points.
- Price consistently falls through major support.
Current price charts of indexes, sectors and industry groups are displaying bear market price patterns.
I have spoken previously about how large institutional money moves markets. Because they are moving large quantities of money in and out of the market, it takes them long periods of time to exit and enter positions. When they move aggressively out or into the market it can show up in breadth charts as a breadth thrust. The stock market has recently experienced a bearish breadth thrust as I have outlined in my past newsletter: What Is Market Breadth Suggesting About Stock Market Risk?
In addition, there are several other long-term breadth indicators that are also signaling bear market conditions.
Risk-Off Assets Verse Risk-On Assets
During periods of market weakness, money moves from riskier holdings like technology, financials, small caps to more defensive assets like treasury bonds, utilities, and consumer staples.
During the current correction, risk-on assets are getting absolutely hammered relative to more defensive assets.
Key Index/Sector/Industry group performance peak-to-trough through December 19, 2018:
- S&P 500: Down 14%
- iShares Russell 2000 ETF (Small Cap): Down 22%
- SPDR S&P 500 Regional Banking ETF: Down 29%
- Technology Select Sector ETF: Down 17%
- iShares Semiconductor ETF: Down 21%
- Vanguard All-World ETF: Down 20%
- United States Oil ETF: Down 37%
- iShares Transportation ETF: Down 20%
- iShares Industrial Sector ETF: Down 18%
While the S&P 500 has not hit bear market lows, there are a lot of other indexes, sectors, and stocks that have.
Global stock markets are, on average, down more than our market. This supports the thesis that we are experiencing a global slowdown that is affecting all markets.
The Bond Market
High yield bonds are falling, and Government Bonds are rising. This basically means credit spreads are widening and this is bearish for the stock market.
Asset Solutions Current Allocation and Strategy
I don’t care if this is a bear market, a duck or just a correction. What I care about is whether the risk I take is relatively low in relation to the return that I forecast I can achieve. When that relationship is not in my favor, it is best to be defensive and wait for better times.
First and foremost, I believe this is a huge opportunity for us. We started selling our stock holdings in late September and were completely out of stocks before the end of October. I believe that odds favor further stock market weakness over the intermediate term. My focus now is watching market technicals and attempting to buy back in at much lower prices, when the risk/reward relationship is skewed back in our favor.
We are currently invested in Government Bond ETF’s and I will be looking to add to those positions if the trend in bond prices remains up.
Are You Currently Invested In Stocks?
Has your financial advisor done anything to FULLY protect you from a falling stock market? If not, now is the time to take action and protect your retirement accounts from further losses. If you are concerned, I can review your account holdings, evaluate your risk, and offer suggestions.
Please feel free to shoot me an email to schedule a review of your accounts.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.