At the start of 2018, we looked at technical charts of the various major indexes and saw only green. Almost every investable market was showing multiple buy signals, and the markets were going up. What a difference a year makes! As we look at the final charts from December 31, 2018, we see an entirely different picture. All of the charts are red and showing sell signals.  When the indicators move this quickly, it is reasonable to be a bit suspicious. Our suspicions encouraged us to look back at the picture that was before us a year ago.

In 2018, January gave us a great upward push. February gave us a huge drop, but then markets began to regroup, and headed upward again — until about September. From then, until the end of the year, aggressive sectors lost ground vs. the conservative sectors, and then as we hit mid-December only Utilities and Healthcare appeared to be spared. By the end of the year even those ‘safe haven’ ideas looked quite sick. The S&P 500 Index*, considered to be generally representative of US markets, was the last major market to drop. From its high in September to its mid-day low on Dec. 26, the index lost 20.08%. All other indexes, both US and Foreign were already in bear territory.

This was clearly the worst year since the bear markets of 2007-2008. Sector rotation (to more conservative holdings) mitigated the worst of the drops, but all investors — even the most conservative — will very likely see red ink on their December statements. This uncomfortable truth brought us to look back at an even longer time frame of history. Let’s zoom out to a view encompassing more than a hundred years.

I wasn’t able to find a chart that runs all the way through 2018, but from 2014 through 2018 we saw generally good years – actually continuing green through the end of 2017. If we all lived long enough, we could appreciate the strength of the markets’ last nine years. But as we likely don’t, have a closer look at the time periods colored red and green.  You’ll note that the green shaded years are blocks that were bull markets – and the red-shaded years are blocks that were bear markets. Interestingly, each typically lasted about a dozen years on average whether a bull or bear market.

I have now had the pleasure of observing half of the bear market that ran from 1966 till 1982, the bull market from 1982 till 2000, the bear market from 2000 till 2009, and the bull market that I believe has now ended – from 2009 till 2017. The question likely to be on many people’s minds at this point, is whether the current market environment will look more like 2008 (which most of you recall vividly), or just a minor blip on the way to new highs. Will the techniques that helped us avoid most of the big drawdowns in 2000 and 2008 work again in the current markets to avoid the huge drops? Will this be one of those bear markets that last a decade or more, or will it be a smaller bear (inside of a larger long-term bull market?)  I’d like to say I know for sure what the future will bring, but of course the crystal ball doesn’t seem to work that way.

For now, it appears that we have a much more volatile market than we were used to (2017), and the volatility tends to increase the up and down moves. Because of that you will observe that your year-end statements show a much lower percentage of equities than you saw earlier in the year. The result is that on the ‘up’ market days you will see less ‘up’. On the other hand, on the ‘down’ market days you will see less ‘down’.  Remember that every prospectus for an investment states that ‘past performance is not indicative of future performance’. Still, we know that less exposure to equities in a waffling market gives us a less volatile environment.

The indication that all major sectors of the US markets are indicating lower prices causes us to expect that the near future will be one of weaker prices.  An exception might be the pricing of gold and gold miner investments.  These areas held up better than most in the prior very weak markets.  On a longer-term basis, however, until and unless we see indications of much greater weakness in our job markets, dollar markets, and equity markets, we will believe that this is a minor bear, in the midst of a larger bull market. (For the engineers, that means a cyclical bear in the midst of a secular bull.)  The shorter cyclical bears have typically lasted less than 24 months- and at this time we see this as perhaps a worst-case scenario. If we are correct, then by avoiding the worst of the drawdowns, we will expect to again participate in the continuing bull or up market once this passes. At that time, we will expect to see higher equity prices.

So, for now, the defensive team is on the field. We are diligently watching to see when the money starts flowing back into the markets causing prices to revert to the upward direction. Once that manifests itself, we will begin to move the offensive team back onto the field. Note in the chart that even the big, bad bears end, and markets have historically resumed their upward trajectory. During this period, it wouldn’t hurt for those of you who can, to withdraw less than you have in recent years. With that in mind, we will work hard to protect your portfolios from what we believe will be, in the end, a ‘baby bear’.


Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.