IF SEPTEMBER 2018 WAS A MAJOR HIGH
In 2018, we are 39 calendar days from the all-time S&P 500 intraday high that was printed on September 21, 2018. The chart below shows the S&P 500 index 39 calendar days after the highest high that was made on October 11, 2007.
Was it “too late” to take defensive action 39 days after the 2007 major stock market peak? You can decide after looking at the “what happened next?” chart below. Point A in the chart above is the same date as shown via point A in the chart below.
IF TODAY WAS THE LOW
Stocks rallied on Tuesday, October 30, 2018 after three weeks of brutal selling pressure. Human nature being what it is, we all feel like we are missing something if stocks go up for a few days when we have some cash on the sidelines. The chart below shows the date of the 2016 market low after getting off to the worst ten-day start to a new year in stock market history.
In the 2016 chart above, notice how it is not uncommon for the stock market to push higher and then backtrack to retest the prior low, something that may or may not happen in 2018. Was all lost if you did not have 100% of your capital reinvested at point A above? The answer is obviously no when we look at the “what happened next?” chart below. Stocks rallied for over two years.
MORAL OF THE STORY
No one knows how 2018 is going to play out. As noted in this week’s video, a fact-based case can be made for both the big-move-up and big-move-down theories. Typically (not always), if we can step back from the day-to-day swings in price and our emotions, we will have time to prudently get allocated in line with the evidence, regardless if the outcome is wildly bearish, as it was in 2007, or wildly bullish, as it was in 2016.
The vast majority of common investing and trading missteps are related to having a very short-term focus and making changes based on short-term fear. We have navigated to a very reasonable and flexible risk-reward posture in 2018. The market will eventually tip its hand in the “new downtrend” or “correction followed by a new uptrend” direction. If we can shift our focus to the bigger picture, the odds of success will increase significantly. If we remain focused on daily fluctuations and short-term outcomes, the odds of success will decrease significantly.
BUT 2018 IS DIFFERENT FROM BOTH 2007 AND 2016
The purpose here is not to compare 2018 to either historical period; we are simply illustrating basic concepts about trends, timeframes, and patience.