We Have Left the Market (in part)

At the end of last week, the main technical indicator we follow (and there are several) gave the same notice it did in in 2007 and 2001 to get out of the market … and so we did.

We didn’t remove all money invested in equity investments, just 50 – 75% of non-income-based securities.  We never sell everything.  Here’s why:

  • The signals we use do not work 100% of the time. Applying this strategy would have gotten us out in September of 2015 and back into the investments the following April; we would have missed 4.5% of return on the money not invested.
  • The indicator to re-purchase the shares can miss the first rally as the Bear Market draws to a close.  In 2009, the S&P 500 hit its lowest point on March 9th.  There was an almost 18% recovery before this Strategy would have us reinvest two months later.
  • Prevailing investment theory is to “Buy-and-Hold.” Though this Technical Indicator Strategy is not the market timing that day traders utilize, it is not the traditional method of acquiring shares and only selling when money is needed for goods and services.  We are trying to improve on the standard, not remake it.

One major rule of investing is: Buy Low / Sell High.  If one does not “Sell High,” what money will be available to “Buy Low?”  Most of the portfolios I manage are static amounts of money; regular additions are not being made.  So, we try to take advantage of the dips in the value by selling a portion and hoping to buy at a discount in the months/years to come.

Instead of relying on instinct, we set technical parameters on when to sell equity positions.  This removes emotion from the equation.  While many people became uncomfortable with the latest downturn and wanted to reduce their risk exposure in the past couple of weeks, we are not even 3 months into the most recent Market Correction; the Correction from earlier in the year was, to this point, a deeper dive in the S&P 500 and it took over 4 months to recover.  Allowing this one to try to work itself out was the right call.  However, indications are now more likely for a prolonged slump.  We acted to stem the tide of possible extended losses.

There are three possible outcomes from selling part of the portfolio:

  • The Stock Market rights itself and we lose the potential to take part in gains.  We run the risk of taking part in a “False Alarm.”  Technical Indicators run independent of the ever-changing investment landscape as it relates to current events.  If Trump pulls a rabbit out of his hat with the China stuff, there will be a pop in the market and we will not be taking full advantage of it.
  • The Stock Market falls in a manner akin to either of the two events last decade.  The last Bear Market saw an S&P 500 decline of 57% and the previous one rang in at 49%.  The average Bear Market usually has an associated drop of 33 – 35% from recent highs. We slashed our positions at about 10% off the highs.
  • The Stock Market moves up and down within a range that is neither impressive nor particularly detrimental to investors. Sidestepping this is not of utmost importance but, it certainly limits our risk exposure during uncertain times.  An ancillary benefit: You will be paying less to mutual fund / etf managers as a percentage of your investments.

Sometimes, use of a Sell Strategy isn’t so much about avoiding potential loss as it is about getting a decent night’s sleep.

What can be done with the money that was invested in stock while the Technical Indicators warn the of the ‘coast not being clear’ so-to-speak?

  • Leave it in a money market fund.  This avoids all loss but doesn’t offer much potential for gain. For now, less than 0.50% is being paid by these funds.  That doesn’t even keep up with our current low rate of inflation.
  • Invest in the short- to intermediate-term debt obligations of governments and companies.  There is risk to the principle value of these investments as we seek a higher return than the Money Market Funds.  Rising interest rates could force the prices of these holdings down.  Or, people could abandon stocks in favor of bonds and the increased demand could keep the prices somewhat stable.
  • Bet against the market using Exchange Traded Funds and Notes. Using complicated securities to basically short-sell some indices as away of taking partial advantage of market downturns is risky.  Only a small portion of one’s account (less than 8% … preferably 5%) should be considered for this attempt at playing market momentum.
  • Pay off personal debt with interest rates above the return we expect for the next 2 years.  If you hold consumer debt (credit cards or other loans) with an interest rate of 6% or higher, now might be a time to consider paying off the balance from assets because your portfolio may not realize that return in the next 12 to 24 months.  There are several caveats to this; see me (or another professional in the personal finance arena) to discuss the specifics of your situation.

What should you do with the invested assets you control?

  • Continue to add to your workplace retirement accounts. In fact, keep putting money into the stock funds at the same pace as you were before.  If you were willing to buy shares at $20, acquiring more at $17 (and perhaps lower) should make you happy.  Build ownership more quickly and wealth may follow.
  • The closer you are to using the money in your retirement program, the more you should consider moving half of your Equity Positions to whatever ‘fixed’or ‘stable value’ is available through your plan.  Those who have 20 or more years until using their funds and/or have less than $50k amassed may not want to bother with these transactions.  Time is on your side and you’ll have several more chances during your lifetime to try this out; we usually get 3 true Bear Markets every couple of decades.
  • Most importantly (and this goes for everyone): Create and maintain a financial plan based on conservative growth figures and account for regular inflation to personal expenses.  It is more important that you are on track to meet your goals than it is to possess a portfolio set for maximum gain at all times.

To be clear, I am not calling this date as the start of our next Bear Market.  I am just saying that the math points to there being more downside than upside in the years to come.  Even if this is the start of something nasty, I would not be surprised if the S&P 500 Index went from 2,600 to 3,000 before testing out 2,000 as a low.

The arrival of Bear Markets had been on a fairly regular, 6-year schedule (give or take a few months).  We are overdue.  The last one stayed with us for 18 months.  The one prior was just under 3 years.  So, the Market may offer a few years of sub-par returns.  Thankfully, those with whom I have been meeting fall into three categories:

  1. Those who can sustain temporary lulls in asset growth
  2. Those who welcome the buying opportunities to get 2019 stock at 2017 prices.
  3. Both 1 & 2

I am not omniscient.  And, I’m not the only one using a technical sell indicator to help people alleviate the stress of taking part in sour markets. 

I am someone who has always liked numbers and feels more comfortable playing odds in my favor. What I see in these numbers gets further confirmation in my mind from the things we’re witnessing outside of stocks: Yield Curve Inversions,Presidential Scandal(s), Political Power Grab(s), International Plots to Destabilize Nations (not just us), Crumbling Infrastructure, Widening Wealth and Income Gaps, Threats to Social Benefit Programs, et al.

It isn’t that those threats didn’t exist before the technical trading thresholds were met.  It’s that, in the absence of good news, there is far too much bad news on which we can dwell.

Some of my clients have opted not to take part in the liquidations or to only start with half the originally intended sales that were set at the creation of each client’s Individual Investment Policy. It’s not my money; it belongs to my clients.  I suggest what’s in their best interests and I carry out their expressed wishes. Those who elected to stay more aggressive than currently prudent will have another opportunity to use or discard this strategy in the years to come.  We got used to portfolio values on the constant rise.  These choppy waters are a good reminder of how markets actually function and how to adjust expectations going forward.

I wish you all a warm, safe, and enjoyable Holiday Season. Please do not hesitate in reaching out to me, so I can do my part in making 2019 your happiest year yet!