On Wednesday, August 19, 2015, the S&P 500 pushed back below 2,090.57. Why is 2,090.57 relevant? That happens to be the 2014 year-ending high reached back on 12/29/2014. In other words, nearly 8 months (163 trading days and counting) have passed by with nothing to show for it.
What’s more? On Thursday, August 20, 2015, the S&P 500 fell below 2,061.75. Why is 2,061.75 relevant? That happens to be the bottom of the 7% trading range the S&P 500 had been trading within since 12/29/2014. And not only was that the tightest sideways range since the beginning of the bull market (March of 2009), it was the tightest range for that long of a stretch in more than two decades!
Thirdly, on Friday, August 21, 2015, the S&P 500 fell below 1,992.37. Why is 1,992.37 relevant? That was where it was trading exactly one year ago to the day. In other words, not only is the market negative on the year, it is now down year-over-year.
Also, this recent bull has been averaging a recent high every six to seven trading days. As of the August 24 close, it has been 65 days (and -11.2%) since the S&P 500 made a new high. In fact, on only four separate occasions has this bull (now six-and-a-half years old) experienced stretches between cycle highs that were longer:
1. From 09/14/2012 to 01/04/2013 (75 days) and included a drop of 8%.
2. From 04/02/2012 to 09/06/2012 (109 days) and included a drop of 10%.
3. From 04/23/2010 to 11/04/2010 (136 days) and included a drop of 16%.
4. From 04/29/2011 to 02/24/2012 (207 days) and included a drop of 19%.
Was that lengthy period of consolidation the proverbial calm before the storm? With the market now down year-to-date and year-over-year, have we already witnessed this business cycle’s peak? Likewise, could we be on a fast track to scenarios #3 and #4 above? Or are we facing something much more ominous?
The reason I ask is because stock valuations are just off of levels that were recently hovering right around all-time highs. Specifically, the cyclically adjusted price-earnings ratio, or CAPE ratio, was recently at levels only seen three other times since 1881 – the years surrounding 1929, 1999 and 2007. And if you were to look up the word ominous in the dictionary, all three of those periods in history could accurately be used in a sentence. Could we be facing our fourth dose of an ominous reality predicated on those previous valuations and periods that followed?
With Monday’s (8/24/2015) continuance of the knee-jerk reaction, the market has finally moved into a 10% retracement phase (aka a corrective period). Prior to that there had not been a single run-of-the-mill correction in 923 trading sessions (44 months). That figure is extraordinary when considering the market averages a corrective period every 18 months or so. The stretching rubber band metaphor comes to mind when such a long period of growth transpires without much in the way of even a 10% hiccup. As the general rule of thumb implies, the longer and further a market trends in one direction, the swifter and more violent its recoil is in the opposite direction.
So far, the past few trading days have experienced quite the recoil and accompanying sting. This has also caused many investors to consider some stinging revelations. Does this bull still have legs to stand on? Or is it finally heading out to pasture after six-and-a-half years? Or, perhaps, will the rubber band snap back in such an epic fashion that the market craters into earth in a near extinction event for the bulls?
Using data for the Dow Jones Industrial Average, we are currently in the 35th business (bull/bear) cycle since 1900. The average cycle length has been 3 years with a mean annual return of 8%. However, don’t let that positive average annual return fool you. In fact, 12 of those previous 34 cycles ended with the index trading 20% lower, on average, than where it started the cycle. That’s right. There was a 35% chance that the bear in the business cycle not only stripped all of the meat from the bull’s bones, it buried those bones deep underground! (Obviously, those instances represent previous craters.)
The reality is, curiosity may kill cats, but volatility kills bulls. With the VIX now trading at levels not seen since the Eurozone Crisis in the summer of 2011, the cautionary flags are waving. Although a VIX spike above 20 is not uncommon, a trend above 20 should be duly noted by stockholders. Historically speaking, an intermediate-term trend above 20 for the VIX signals a high likelihood that a meaningful, and extended, reversal is in the making. Yet, it’s an indicator that also usually provides investors with ample opportunity to limit their losses.
Granted, a panic-driven stampede for the exits is never advisable. However, you should be considering options to protect what you have amassed over the past six years. The market has already set itself back one full year. If history is any indication, there’s a notable chance you could be set back even further if you don’t have a plan to protect. After all, the average bear market is -32%. If we are already in the throes of history’s average bear, we are only a third of the way to the bottom.
If you have no clear discipline or strategy to limit your portfolio’s volatility and drawdown, you are probably already dealing with hints of doubt on what to do from this point forward.
Just considering what has transpired in the past week – with the breaching of those previously mentioned price points – one is not left with much in the way of positive vibes from stocks. The market has been far removed from the price behavior we have grown accustomed to.
Yet, with this recent batch of volatility hot out of the oven, not all investors have been negatively affected. For example, those asset classes that make up the FTSE Custom Multi-Asset Stock Hedge (MASH) index – an index we, here at Pacific Park Financial, Inc., created in conjunction with FTSE-Russell – has weathered the volatility quite admirably. The following chart contains the trailing returns of the S&P 500 and the MASH index through 8/24/2015.
As you can see, MASH’s 1-Week, 1-Month and 3-Month outperformance differentials over the S&P 500 were 12.1%, 11.8% and 12.5%, respectively.
Perhaps a look beyond stocks is finally warranted.
If you are interested in learning more about the FTSE Custom Multi-Asset Stock Hedge (MASH) Index and whether it is appropriate for your portfolio, give us a call at 888-500-GARY (4279). Additionally, please click here to inquire about investing in the MASH index via our website.
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