Investor Alert
Adam D. Koos, CFP®

Dec. 20, 2016, 2:08 p.m. EST

If the market drops, just buy the dip

By Adam D. Koos, CFP®

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I've admittedly been bearish for a long time. We had a pre-election year in 2015, which is usually the best-performing year for the market of the four-year election cycle. Instead, it was the first down year in decades. The "Santa Claus Rally," which normally prints exciting, positive returns turned a typical profit into a loss. The first two weeks of this year ended up being the worst start for the market in history and the first month of 2016 resulted in the worst January since the early 1900s.

The S&P (S&P:SPX)  and Dow were printing lower lows, threatening a potential crash and long-term trends starting pointing down for the first time in a long while. The risk wasn't worth the reward. But instead of a crash, 2016 ended a two-year consolidation that ultimately resolved to the upside after the most controversial presidential election in history.

Opinion has no place in investing. As Jesse Livermore once said, "Don't trust your opinion or back your judgment until the action of the market itself confirms your opinion." In other words, the market is going to do what it wants, and it's our job to listen to the market, not the other way around. Those who try to predict what the predictors are going to do inevitably end up holding an empty wallet in the end. Instead, you should allow the market to tell you what it wants to do and then follow the trend.

Buy-and-hold disciples are basking in the glory of these last few years. They've done virtually nothing and are partying to their hearts' content, staring at 80-year mountain charts and reassuring naïve clients despite crises past.

It doesn't matter that we're living in the second-longest bull market in history. They pay no mind to such a statistic and instead tell you to "buy more shares when they're cheaper," or that "you haven't lost anything unless you sell it." These are the same people who will graciously hold your hand as they jump off the cliff with you, yelling "it's okayyyyyy. It'll come baaaaaack" as their voices echo against the cliff of a 50% loss (which, I might add, takes a 100% gain to re-coup). How empathetic of them, but I digress.

The truth is that many market technicians ended up being wrong in the end this year, and I was one of them. The market told us it was headed down, but outside forces such as the Federal Reserve, ZIRP, and Janet Yellen had other plans. Instead of the six rate hikes planned in December of 2015, "dovish" commentary out of Fed meetings sent the market higher. Sellers were ever present and risks of a crash the same. However, the market changed its mind in spite of all the red flags, rendering many trend followers wrong in the end.

One of my mentors — a legend in the portfolio management business — once told me, "It doesn't matter if you're wrong. You just can't stay wrong. Everyone fails in their analysis. The secret is to fail fast and move on, learning from your mistakes and improving upon your process."

So while I spent a good portion of 2016 playing it safe, avoiding risks that didn't justify an equivalent reward in return, the market has cried to the masses and has made itself crystal clear: We find ourselves again in a bull market. Plain and simple. As a result of this recent market action, we should be adjusting our portfolios and "listening" to the market's message.

As you can see in the chart below, the S&P 500 broke through the August highs prior to the election, pulled back for nine days, and then soared through the metaphorical ceiling that previously existed, sending the market to new, record highs. The longer-term moving averages are sloping up, intermediate-term trends are positive and accelerating, and most recently, a flag has formed in the past few trading days, indicating a continuation of the prior trend (which is clearly up).

For a larger chart, please click here .

We could see a pullback to one of the red, dotted lines (representing support) before the next leg resumes and trouble would only be present if we closed below the bottom line for more than a few days. Meanwhile, any pullbacks should be viewed as buying opportunities within the midst of a longer-term uptrend. Any other "opinion" is speculation without supporting evidence.

Link to MarketWatch's Slice.