Distinguishing a Price Correction from a Change In Trend using the Blue Line

With the current stock market correction in full gear we thought this would be a great time to expound on the comment we made in an article posted on January 26th – “Is the DOW within 3% of a temporary top?” Why would we say “temporary” rather than just “top?” We believe the answer can always be found with the Blue Line.

At the time of this writing, the S&P 500 Index² (S&P) has dropped 7 ½% in under two weeks. But even with that drop the S&P still remains above the Blue Line. Since 1980, the first thing that has to happen before the market can transition into a Negative Trend is price has to drop below the Blue Line. Right now the market is still 4% above the Blue Line (but we would not be surprised to see it drop below the Blue Line before this corrective phase is over). Therefore we continue to believe this to be a “temporary” top and not THE “top.”

So historically speaking, what are some examples of price corrections in the S&P worse than the present that did not cause an end to the bull market that was in process at that time?

1987     30% price correction from October to December (3 months)

1998     21% price correction from July to September (3 months)

2010     16% price correction from April to July (4 months)

2011     18% price correction from July to September (3 months)

2014     09% price correction from September to October (2 months)

Even in 1987, during the long bull market in the Tokyo Nikkei 225 Index ($NIKK), the NIKK experienced a 20% price correction from October through November (2 months) before continuing the bull market.

So what do we expect from here? We expect the stock market to experience a price bounce in the coming days or maybe weeks. We intend on making some strategic changes to our strategies at that time in an effort to protect against what could be another decline that occurs thereafter. We expect the markets to touch the Blue Line before this corrective phase is over. For new clients to Blue Line Investing, the Blue Line is our preferred purchase point when clients are holding cash in their accounts, as well as to invest money held within cash equivalents within our BLUE LINE INVESTING™ Strategies.

Of course, anything can happen, but we are making preparations based on what we expect may happen. If the data changes from what we expect, we will modify our plan accordingly.

Please do not hesitate to call us at the number at the top of the page with any questions or concerns. As a value-added service to our clients, we would be happy to talk with family, friends, or co-workers who may be concerned during the current price correction.

Jeff Link

Disclaimers:

¹ Blue Line Investing (BLI) is an alternative to traditional wealth management. BLI uses a disciplined, rules-based investment process to seek investment opportunities, regardless of whether financial markets are rising or falling. Based on technical analysis research, the process applies trend-following using specific Exponential Moving Averages (EMAs) of the market along with other technical indicators. A moving average is a widely used indicator in technical analysis that helps smooth out past price action by filtering out the “noise” from random price fluctuations. EMA’s can be calculated for any time period. Some examples include the 5 day EMA; 50 day EMA; and 150 day EMA. We have attempted to simplify this by calling the various EMAs we use in our process the “Blue”, “Purple” and “Green” lines.

² The S&P 500 Index is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. It is comprised of 500 large companies having common stock listed on the NYSE or NASDAQ. The volatility (beta) of the account may be greater or less than the index. It is not possible to invest directly in this index.

³ The Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). It is a price-weighted index, operating in the Japanese Yen, and its components are reviewed once a year. Currently, the Nikkei is the most widely quoted average of Japanese equities, similar to the Dow Jones Industrial Average. The volatility (beta) of an account may be more or less than an index. It is not possible to invest directly in an index.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of Blue Line Investing. The opinions referenced are as of the date of publication and are subject to change without notice. Blue Line Investing reserves the right to modify its current investment strategies based on changing market dynamics or client needs.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. This information is intended for educational purposes only and should not be considered financial advice. It should not be assumed that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Forward looking statements cannot be guaranteed.

Advisory services offered through Gordon Asset Management, LLC (GAM). GAM is an SEC-registered investment adviser. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (866) 216-1920. The principle office of Gordon Asset Management, LLC is located at 1007 Slater Road, Suite 200, Durham, North Carolina, 27703.