“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Equity markets have been in a moderate to severe correction, depending on the index, since the first trading day of 2022. Accordingly, equities have also been in a short-term downtrend. For quick reference, we define short-term as three months, intermediate term as six months, and long term as one year and longer. Intermediate-term, equities are in a trading range, or sideways trend. Long term, equities are still in a long-term uptrend consistent with a long term Bull Market, which is now in its thirteenth year going all the way back to the Financial Crisis of ‘08 to ‘09.
Yes, this is a very mature Bull Market. And no, it’s not over till it’s over, (thank you Yogi Berra.) Going back to the intermediate term, or last six months, this trading range measures at 14.6% from top to bottom, all of which occurred in 2022, with a midpoint of +-7.3%. Additionally, the S&P 500 Index is +4.61% higher than it was six months ago. As for the long term trend, the S&P 500 is +14.4% higher than it was one year ago. The data supports the trend interpretations because the interpretations are derived from the data. Of course! I am a data-driven, technically driven investment advisor.
Now let’s roll all the way back to the short-term trend, which became very interesting in the month of March. Now we are looking for the exceptions. The bottom of this short-term trend for the S&P 500 was seen on February 24th and was followed by a significant bounce higher. Though still in the downtrend, the S&P 500 set in a double bottom March 8th and 14th that was slightly higher than the February 24th low. Very interesting. The real test was going to be whether the S&P 500 could break that short term downtrend, which it did on St. Patrick’s Day. It crossed above the 50-day moving average the very next day and the 150-day moving average on March 24th. Exceptional!
Emboldened by this very positive exception, we took steps to become fully invested once again. All of our models had been harboring a larger than average cash position since mid-January. This benefited performance during the correction because cash doesn’t go down. It also doesn’t go up with current interest rates so low, but it does represent a safe haven until the ‘fog of the decline’ clears. The choices for reinvestment were equally exceptional, being positions that had also been declining, and also broke downtrends step in time with the S&P 500. Equity markets remain highly volatile, but we like our prospects and feel comfortable at current levels.
Bond markets have not been so fortunate. The Barclays Aggregate Bond Index is currently in a short term downtrend, an intermediate term downtrend, and a long term downtrend. Bond indexes move more slowly than equity indexes, but on the charts the data presents the same. Equity markets are complex and are influenced by a large number of inputs, but bond markets are more simplistic. They have a difficult time when inflation is high and/or rising, which is certainly the case. The Federal Reserve is planning to combat inflation by allowing interest rates to move higher, another headwind for bonds.
While this equity correction may be misnamed as the Russia-Ukraine Correction, it does remain sensitive to national news, which begins and ends daily on the conflict. Thus far, despite the human tragedy, it has been surprising in its development. The ultimate outcome remains to be seen, but both Russia and the Ukraine have vulnerabilities that may lead to negotiations. Russia is dealing with huge economic problems that will take years to correct. The Ukraine is enduring huge physical and human damage that will also take years to repair. Barring a drastic turn of events, steps toward a negotiated peace may serve as a catalyst and continue to fuel an equity market recovery in the U.S. and Europe. For the people, not for the markets, we continue to pray.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.