10-05-2021 - Are you listening to Guesstimators?
I am going to refer quite a bit to my "Total Market Index" chart below in this afternoon's blog. It is 40% S&P 500, 40% Nasdaq, 15% Dow and 5% Russell 2000. It represents my definition of the "total market".
The market has dropped almost 4.5% since mid-September (that's been less than a month). It has moved from and all-time high, falling through my "Early Warning" level and then through my "Trend Reversal Warning" level. It is not (yet) showing any significant signal that it (the market) is trending higher, yet many investors and talking heads on CNBC and Fox Business are saying now is the time to "buy-the-dip".
And what is important... They might be right. That's the thing about guessing. Sometimes you flip the coin and call for heads and it comes up heads (proof that you are a genius investor); sometimes it comes up tails, though. These guesstimators (coining a new word, here) make a pretty good living by espousing their guesses. Of course, you rarely hear about their guesses that miss the mark.
I often wonder why they are guessing at all, when the market is more than willing to tell you exactly where it is and no guessing is needed. More on this below...
The guesstimators seem to like flipping coins, rolling dice, and making it sound like they have a crystal ball that accurately predicts the future. Spoiler Alert: No one has a crystal ball that can accurately (and consistently) predict a future market.
The market, on the other hand, tells you exactly where it is and how it got there. What's more, you really don't need any more information that that. You want to know whether to buy the dip or not? Well, the market is certainly not indicating that you should... not this week anyway... that is, unless you are willing to bet the guesstimators are right; and, they certainly 'could' be. But... I don't like investing millions dollars on hunches, ideas, guesses. I am not a guesstimator and I don't listen to them.
Some say, the market always reverts to its mean. Well... it doesn't take a mental giant to recognize the truth of that statement if you wait long enough and lose enough money along the way.
Some say, the bottom is "in" and now is the time to buy. Well... for the past 100+ years, the market has (if you wait long enough and lose enough money) always moved higher at some point. While the market 'could' fall 30%, 40%, 70%... it will eventually recover (it always has). Granted, it might take you a decade or two to get back to even, but the market will 'eventually' move higher.
Here is what I know and it is not a guess: The market has fallen 4.5% in the past 3 weeks and it is not showing any significant technical signs that it is moving back into a bull market trend. But... just as importantly, it has not shown any significant technical sign that it is going to move into a bear market, either. The market has moved low enough to indicate now is NOT the time to be buying, but until it falls below the next major indicator (the mid-point of my "volatility band" which is just 3.6% away from where it closed today), it is not signaling that it is time to move into a bear market strategy, either.
Take a look at the far right side of the chart, above. Here is what it is telling us:
The market is inside the yellow band. That band represents the normal volatility of the market. When the market ("Composite" black line) falls from above to inside the volatility band, caution is advised. At this level, the market could fall further to the downside (see February of 2020) or it could suddenly recover as it did in October of 2020 and move on to new highs. The rule is: "When the market drops into the yellow band, stop buying and raise stops on existing holdings." No guessing. That's the rule.
When the market falls from above the "Early Warning" line to below it, the market is telling us that we should start being much more cautious about investing in the market. It does NOT mean to sell everything and head for the hills, but it does mean that further downside is certainly possible. When that did occur a couple of weeks ago, I tightened my stops and if stop was triggered, I kept that money in cash until the market moves back above the Early Warning level, or if the sell-off continues, the market will trigger a bear-market strategy.
In this case, the Early Warning trigger was correct... the market kept falling. In fact, it fell through the next trigger point; the "Trend Reversal Warning" level. This is a technical indicator that tells me that the market 'might' be getting ready to move from a bull-trend to a bear-trend. When the market is below the Trend Reversal Warning level and still above the mid-point of the volatility band, extreme caution is in play. Absolutely no buying of anything and stops are raised, if possible, above the basis level of each holding to lock in profits if the market continues to sell off.
If (or when) the market falls below the yellow band mid-point, a trend reversal is confirmed and it will be time to start moving into a bear-market investment bias. In my world, that means legging into inverse index ETFs and certainly no buying of stocks or non-inverse ETFs.
There is no guessing in this process. Instead, it is simply reading where the market IS and not where I think/hope/guess where the market will be tomorrow, later this week, next week, next month, 10 years from now. I know that the best place to be is right where the market is and not be a guesstimator.
So... where am I right now? I am 100% cash in my index portfolio; 87% cash in my growth portfolios; and, about 20% cash in my dividend portfolio. Want to know more? You can always call me: 855-678-8200