Why Everything You Know About Stocks And Bonds Is About To Change

STOCKS VS. BONDS – THE SINGLE BEST SIGNAL

This week's video asks what can we learn about the stock market's long-term risk-reward profile by studying three charts:  (1) S&P 500 vs. 30-YR Treasuries, (2) Value Line Geometric Index, and (3) the NASDAQ.

INVESTING FOR INCOME IS A WHOLE NEW BALLGAME

All instruments that pay dividends have bond-like characteristics, including preferred stocks, MLPs, and REITS.  Therefore, the concepts in this week's video impact all yield-oriented or income-oriented investments. 

Why Tech Stocks Could Rise For Many Years

STATUS OF THE NASDAQ'S LONG-TERM BREAKOUT

Between points A and B in the chart below, the tech-heavy NASDAQ experienced numerous bouts of emotionally-draining volatility.  The same A to B period featured a secular trend that lasted 16.66 years and posted a hard-to-comprehend 1,513% gain.

Since the latter stages of the 16.66 year move checked every "this looks like a bubble" box, it is not surprising the market had to consolidate its gains, which is exactly what happened over the next 16.66 years.  Between points B and C, the NASDAQ went absolutely, positively nowhere before breaking out of the massive and multiple-year consolidation box in late 2016 (above point C).

THE LONGER A MARKET GOES SIDEWAYS

Regular viewers of CCM's weekly videos are familiar with the expression, the longer a market goes sideways, the bigger the move we can expect to get after either a bullish breakout or bearish breakdown.  Prior to completing the 1991-2000 leg of the secular move, the NASDAQ went sideways for 3.8 years. Prior to breaking out and successfully retesting the breakout in 2016, the NASDAQ went sideways for 16.66 years (see chart below).

MORAL OF THE STORY

The moral of the story is market fractals tell us it is in the realm of possibility the NASDAQ could rally for a period much longer than the human mind can easily comprehend and the magnitude of the gains could be extremely satisfying.  If you have studied charts for years, the previous sentence is not really even debatable; it is the message from the present day charts.   

PROBABILISTIC STATEMENTS BASED ON FACTS

We are simply making statements about the probability of good things happening relative to the probability of bad things happening over the next 5 to 20 years.  If the facts in hand and charts change in a meaningful way, the assessment of the probabilities must be adjusted as well.   We will continue to take it day by day, remaining open to all outcomes, from wildly bullish to painfully bearish. 

YOU ARE OUT OF YOUR MIND

If we were working on Wall Street in 1990 and called a group of coworkers and clients into a conference room and said...

"The NASDAQ WILL gain 940% over the next nine years"

...you would have been laughed out of the room and told to get some help.  And yet, that is exactly what happened between points E and F below.  Skepticism is part of the early stages of a secular trend script.  We are supposed to be skeptical with chart patterns like the one shown below.  It is logical to be skeptical after the NASDAQ disappointed us for 16.66 years.

WHAT ABOUT?

The market considers all topics on all timeframes.  Therefore, every single "what about" question is reflected in the charts above.  

• What about valuations?  Click here
• What about the fact that stocks have gone up for 9 years? Click here
• What about the health of the bull market in light of recent volatility? Click here

Key Points: Bull Markets And Bottoms

The market opened down Tuesday.  Since humans tend to focus on what is in front of them (a red screen), it is prudent to review some "stay focused on the facts" key points.

KEY #1: IT STILL LOOKS LIKE A BULL

The video at the bottom of this post compares 2018 to 2000 and 2007 using numerous timeframes; the conclusions are the same.

KEY #2: 2018 HAS THE STRONGEST RELATIVE PROFILE

As outlined in detail in Stock Market Plunge Period Reference Points, 2018 has the strongest fact/data-based profile relative to the volatile periods shown below.  When plunges occur from strong market profiles, the waterfall drop tends to be sharp, but relatively brief in duration. 

KEY #3: BULL MARKETS MAKE HIGHER HIGHS

We are currently in a bull market. Bull markets by definition make a series of higher highs and higher lows. Thus, if we believe the bull market is still intact, at some point in the future, stocks  will make a new all-time high.  Bull markets reward those with patience and a long-term focus.   

KEY #4: BOTTOMS CAN TAKE TIME TO FORM

As shown in the charts below, even after the plunge period was complete, it was not a volatility cake walk in the three historical cases.  In 1987, the S&P 500 printed a slightly lower low two months after the waterfall plunge. 

In 1998, the original plunge low was retested a few weeks later and price stayed inside a yo-yo box for two months.  Nothing says the market has to give an "all clear" signal after a plunge. 

In 2011, stocks were in a bull market, a waterfall decline occurred, and stocks subsequently stayed inside a wild-ride volatility box for 4 months.  As expected in a bull market, stocks eventually  followed the plunge with very satisfying gains.

IN EACH CASE, A HIGHER HIGH WAS MADE

2018 really doesn't look anything like 2000 or 2007.  2018 is stronger than 1955, 1987, 1998, 2011, and 2015 (bull market cases).  In every bull market case, stocks eventually followed the bull market script and printed a higher high.  A higher high means higher profits and higher account balances relative to pre-plunge profits and balances.   

REALISTIC EXPECTATIONS ARE PART OF ANY SUCCESSFUL ENDEAVOR

It would be great if the stock market was green every day and we never had a correction in a bull market.  Common sense tells us that is not realistic.  Even if we remain in a bull market and stocks eventually go on to make a new all-time high later this year (TBD), we should not expect every day, every week, or every month to be green. 

The market's present day long-term profile allows us to be patient. If the profile deteriorates in a material manner, then we will take the necessary defensive steps.  We will continue to take it day by day, remaining open to all outcomes. 

Via @RyanDetrick

"Since 1980, the avg max intra-year correction for the S&P 500 is 13.7%."

Which means, so far, 2018 falls into the 100% normal and to be expected category as described here: https://t.co/vzXOhbiX82#Markets $SPX pic.twitter.com/EORo7PPuH9

— Chris Ciovacco (@CiovaccoCapital) February 12, 2018

ADDITIONAL FACT-BASED ANALYSIS

Will Rising Yields Push The Bull Over An Important Demarcation Line?

MARKETS CAN GET SPOOKED BY RISING YIELDS

This week's video covers numerous topics and markets, including the selloff in bonds, the impact on stocks, comparisons to 2000 and 2007 major tops, status of multiple-year breakouts, asset class behavior near tops and bottoms, tech stocks, industrial stocks, S&P 500,  Value Line Geometric Index, and the broad NYSE Composite Stock Index.  The video covers over 40 charts.