There’s an old saying, “You can’t find what you’re not looking for.” With US stock markets at all-time highs, some investors are throwing caution to the wind and buying into the stock market expecting continued above-average returns. And while it is certainly possible for prices to continue to rise, I believe the probability for a channel correction is high if you know what to look for. Historically, these types of corrections can result in stock market drops between 20 to 35%, typically taking place within twelve months.
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PRIMARY TREND: RISING
Chart courtesy of StockCharts.com
Based on my experiences, when investors suffer from these types of corrections it is usually due to one or two main reasons. The first is they are investing on their own and don’t know what they don’t know. They tend to make future investment decisions by extrapolating the past into the future. It can be easy to forget that it is historically common for periods of above-average returns to be followed by periods of below-average returns.
The second reason is due to complacency. They may be complacent because they are working with an investment professional (IP) and believe they will manage their risk for them. But what they may not realize is two-of-the-three most used investment strategies by IP’s tend to follow the ups and downs of the stock market roller coaster. Just because someone is working with an IP does not mean their investment strategy will buck the trend – especially when the trend is going down.
THE “BLUE LINE”: A CLOSER LOOK
Chart courtesy of StockCharts.com
The S&P finished the month of December 9.2% above the Blue Line, compared to 6.6% above the Blue Line at the end of November (please refer to the green arrow at the far right-hand side of the chart above). Currently price remains above the Blue Line.
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The BLUE LINE INVESTING® (BLI) investment process was founded on over 95 years of stock market history. It seeks to identify and align investment decisions with multiyear trends. Various aspects of this process have been illustrated in my book Protecting The Pig: How Stock Market Trends Reveal the Way to Grow and Preserve Your Wealth.
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.
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 BLI. The opinions referenced are as of the date of publication and are subject to change without notice. BLI 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. Forward looking statements cannot be guaranteed.
Guardian Wealth Advisors, LLC (“GWA”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about GWA’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.