By Adam D. Koos, CFP®
From early March 2008 through mid May, the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.73% rose by more than 12%, and I distinctly remember investors saying the same thing now that they were saying then: The market correction was over and that new all-time highs were right around the corner. Instead, the market proceeded to fall -52% from May 12, 2008, through the beginning of March 2009.
In other words, the wealth of those invested in the stock market was largely cut in half in less than 10 months. There’s a lesson to be learned here with regard to the underlying factors taking place at that time, what’s happening now, and why investors should be wary..
As of Thursday, May 12, we've been living in a bull market for 2,621 days, which just happens to translate into the second-longest bull market in history. You can see a visual representation of this historic run in the chart below (with a bigger one if you follow the link), but what I also want to point out is the very distinct topping process that occurred during the last two stock-market crashes.
As I've mentioned before, I am not in the business of predicting what the markets are going to do tomorrow, next week, next month, or through the end of this year. I leave that jawboning to the entertainers on TV. Any seasoned portfolio manager who implements the use of technical analysis will tell you that our job is to:
Observe the current market landscape across multiple asset classes,
Determine the current risk/reward trade-off exhibited throughout the market landscape
Execute the appropriate allocation (long, short, or no position at all).
One or two or three days does not make a trend
Let's start with stocks. If one were to observe the positive 200-plus-point rise in the Dow on Tuesday, they might think that it was the strong start to a new leg in today's bull market. The problem is, one day isn't a trend (nor is two or three days, by the way).
To the contrary, moving-average indicators have been negatively diverging since March, and as the U.S. markets have started to decline in the past couple of weeks, volume has been picking up, which is evidence that sellers (supply) are winning the battle vs. buyers (demand).
It's comical to watch financial news continue to regurgitate the fact that the market is within X% of its all-time high. Think about this for a second. Don't markets always come to within a certain small percentage of their all-time high before crashing? It's as if investors believe that when we enter a bear market, it only goes down and never goes up.
Here's a statistic for you: In 2008, there were exactly the same number of up days as down days, but the market still fell to the tune of roughly -37% that year. So it's days like Tuesday that trick people into thinking that the coast is clear only to have their portfolio sniped by the S&P 500 over the course of the following months.
Is overseas the answer?
Switching gears to international stocks, they look even worse than the U.S. markets, especially in light of the rise in the U.S. dollar this past 22 months, but don't be fooled into thinking that a correction in the dollar would cause a broad rise in international investments.
Currencies are pretty tough to call. There are some short-term traders who can benefit from the volatility in the yen or even the U.S. dollar. Otherwise, there are better places to put money that reflect a better risk/reward ratio today.
What do bonds and commodities say?
Bonds are also a difficult asset class to invest in today. Long-term corporates, municipals and government bonds have fared well in the past, but we keep finding ourselves in this precarious position when it comes to interest rates. The best advice I can give when it comes to fixed income is to pay attention. Many investors perceive bonds to be "safe," so people tend to invest with a "set-it-and-forget-it" strategy. Just remember, even bonds — as represented by the iShares Core U.S. Aggregate Bond ETF /zigman2/quotes/200660887/composite AGG +0.44% — fell violently in fall of 2008.
Commodities continue to be the brightest asset class in my view. Agricultural positions, metals and even oil and energy are all showing some resilience through the first trimester of 2016.
Bottom line, as much as my emotions might tell me to buy stocks, you can't fly a plane at night without using your instruments. And when looking at the stock market from a technical perspective, it's dark, cloudy, drizzling outside, and we want to do our best to avoid the storm as opposed to flying right through it.