2000/2007/2018: 199 Days After The Peak

TRENDS AND TOLERANCE FOR RISK

If we knew with 100% certainty the stock market was on the verge of falling 50%, as it did after the peaks in 2000 and 2007, would we rather own 100% stocks or 100% bonds?  The answer is simple - bonds.  Thus, we can learn something about the present day market's tolerance for risk by reviewing some stock/bond ratio charts.

199 DAYS AFTER THE 2000 PEAK

The S&P 500 peaked on March 24, 2000.  October 9, 2000 was 199 calendar days after the stock market's major bull market top.  The charts that follow show long-term trends in the stock/bond ratio.  Notice how 199 days after the stock market peaked, the 30-week moving average had moved from the top of the cluster to the bottom of the cluster, which indicates waning conviction to own stocks relative to more defensive-oriented bonds.

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199 DAYS AFTER THE 2007 PEAK

A similar "the bullish trend is rolling over" look was clearly present on the same stock/bond ratio chart 199 calendar days after the S&P 500 peaked in the 2007-2008 period.

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199 DAYS AFTER THE 2018 PEAK

The S&P 500's highest close in 2018 came on January 26, or 199 calendar days ago.  How does the same ratio look today?  The answer is much better, telling us to maintain an open mind about better than expected outcomes for stocks relative to bonds in the weeks, months, and years ahead.

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RED SCREENS AND SCARY HEADLINES

The S&P 500's year-to-date low was made on February 9 at a level of 2,532.  Relative to last Friday's close, the market had gained 300 points since printing the intraday YTD low.

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This week's video walks through the 2018 correction and subsequent move off the low, allowing us to make a logical comparison of trying to make decisions based on short-term trends/scary headlines relative to leveraging factual data based on long-term trends.

CHARTS HELP WITH ASSESSING ODDS

Charts and hard data cannot predict the future; they simply help us objectively assess the odds of good things happening relative to the the odds of bad things happening.  Just as the charts said "try to be patient" in early February, they continue to favor good things happening between now and year-end.  We will continue to take it day by day and remain open to all outcomes.  If the data shifts in a meaningful way, we will adjust the odds.  That may happen, but it hasn't happened yet. 

The Incredibly Important Big Picture

THE VIEW OF THE STOCK MARKET THAT IS RARELY TALKED ABOUT

Sound strategy starts with having the right goal.
— Michael Porter

The current leg of the NASDAQ's rally began on February 11, 2016 or 907 calendar days ago. The NASDAQ made a new all-time high on July 25, 2018 and then fell sharply for 3 days. Many were saying the tech-led rally was coming to an end. While that may turn out to be the case, a 3-day drop has almost no impact on the math related to a trend that began 907 calendar days ago. As shown below, the really big picture for the NASDAQ still tells us to remain open to much better than expected outcomes in the coming years. 

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WHY EVERYTHING YOU KNOW ABOUT ASSET ALLOCATION IS ABOUT TO CHANGE

In this week's stock market video:

  • The single best signal.
  • Your pie chart may disappoint in the next 20 years.
  • My bonds seem to be acting differently. 
  • The lure of past balanced portfolio performance.
  • Has diversification worked well in 2018?
  • It’s all we know (recency bias).
  • Haven’t seen anything like this in 35 years. 
  • The market has changed and we may have to adjust significantly. 
  • The real world 1926-2018 vs. perceptions.
  • Is bullish momentum waning?
  • Should we be concerned about breadth? 
  • But, we are near all-time highs.

LONG-TERM BREAKOUT IS HOLDING

A common bearish argument says the stock market is being led by only 4 or 5 major stocks. The chart below clearly demonstrates the average stock is participating in the current bull market. The Value Line Geometric Index contains approximately 1,700 stocks and is equally-weighted. The index recently broke above levels that acted as resistance in 1998, 2007, and 2017.

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THE END OF THE NORMAL CORRECTION IN STOCKS?

While the S&P 500 has yet to recapture the highs made in January, many other major indexes have pushed to new all-time highs, including the broad Wilshire 5000 Index as noted by Mark Hulbert on MarketWatch

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Why Everything You Know About Asset Allocation Is About To Change

In this week's stock market video:  

  • The single best signal.
  • Your pie chart may disappoint in the next 20 years.
  • My bonds seem to be acting differently. 
  • The lure of past balanced portfolio performance.
  • Has diversification worked well in 2018?
  • It’s all we know (recency bias).
  • Haven’t seen anything like this in 35 years. 
  • The market has changed and we may have to adjust significantly. 
  • The real world 1926-2018 vs. perceptions.
  • Is bullish momentum waning?
  • Should we be concerned about breadth? 
  • But, we are near all-time highs.