Any of you who have been reading our thoughts for a while have likely heard my comment: ‘When everyone seems worried about the markets, there is room for growth, but when you wake up one morning and it appears that everyone is happy and excited about how great things look, it’s time to run for the hills!’
So, this year so far has looked pretty ugly. Here is the market as represented by the SPY ticker. I feel it’s a good representation of the US market as the S&P Index represents the collective value of about 80% of the investable stocks in this country.
Well, I said it’s pretty ugly. Other than the bounce in mid-March the year has been solidly purple and dark purple on the GONOGO chart. That’s an indication that stocks are moving down (light purple) or strongly down (dark purple). SO, when bear markets hit, what happens? People start to sell their stocks as they watch their portfolio values drop. As stocks continue to drop more people sell their stocks, the charts look worse, and the ugly charts beget more selling. This happens (historically) until something changes. The common thing that changes is people stop selling their stocks. There are always some groups of people that have the fortitude to grit their teeth and declare that ‘things will get better,’ and they hold their stocks. Many will lose their fortitude and throw in the towel and sell, even though they thought they could hold on. But eventually (yes eventually) the people who held on are still holding on (some of them anyway), and there are no more people left who will sell their stocks. At that point, the selling stops, and markets stop going down. This MAY seem obvious, but before stocks can go back up, they must stop going down. When they stop going down, some investors see that as a big positive, and begin to buy stocks. The buying begets more buying and the cycle repeats.
So, the multi-billion-dollar questions is WHEN does the selling stop? The crystal ball is a bit hazy on that one.
But we can tell you this. The investors who manage to lose much less than the markets in general (less than the indexes) are in better shape to show gains as the markets eventually bounce. We are continuing to watch for signs of the bounce. They are not here yet, and as many pundits are predicting the bottom soon, note that there also are many predicting a bottom much farther off. We’ll see, but as we sit in a VERY conservative risk-off position, we’re confident that our clients will be among the group that will maintain most of their portfolio values and be able to potentially profit when markets once again turn up. Stay tuned.
Ron’s Market Minute — What I’m Watching Right Now
The reduced selling pressure in the last two weeks of May is a sign of shorter-term strength in stock markets, but a lot more needs to happen to reverse the longer-term downtrends. My guess is that the recent bounce in the long-term US Treasury Bond (shown as TLT) and the fall in the 10-year US Treasury RATE (shown as TNX) likely have something to do with that. The chart below shows the short- term bounce of the 20-year bond – purple lines but the longer-term trend is obviously down.
The chart in the lower half of the graphic shows the 10-year treasury yield correcting (pulling back down) while the longer-term trend has been obviously up. A continuation DOWN of the 20-year bond price would be bearish for stocks although a bounce that continues UP would be bullish for stocks. A continuation UP of the treasury yield would be bearish for stocks, while a stronger bounce DOWN would be bullish for stocks. In other words, a continuation of the longer-term trends since the beginning of 2022 on both of the graphs is an indication of further deterioration in stocks, and a reversal of the longer trends would give us hope that we’re closer to the bottom of this current drawdown.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
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