While Everyone Is Watching Bitcoin, I'm Watching This


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Source: AdobeStock

Source: AdobeStock

Source: Barchart.com

Source: Barchart.com

The hysteria surrounding cryptocurrency is alive and well, but while speculators obsess about that space of the investment world, I have my eyes on something that is far more critical to those whose hard-earned wealth is more correlated to the fate of the stock and bond markets.&nbsp; Above is what I’d call the really, really, REALLY big picture for the U.S. stock market.&nbsp; It covers the last 20 years of the S&amp;P 500, updated through February 14, 2018.&nbsp; My observations are threefold:

  1. We are literally in “un-charted” territory. During the heights of the market pre-financial crisis, the index stopped rising at around the same point it did during the dot-com bubble.&nbsp; This time around, that old high from 2007 has been left in the dust.&nbsp; That makes the analysis a bit tougher in determining just how dangerous this latest potential bull market peak can be.
  2. The bottom of the chart shows the “Percentage Price Oscillator” for the S&amp;P 500 using monthly prices. You can see that it has reached a level similar to that of the late 1990s and the 2007 market top.&nbsp; But as we see, this indicator also reached this level in late 2015, which led to a sharp but limited selloff into early 2016, before the Federal Reserve pumped more money into the economy and staved off what appeared to be the end of the long bull run.&nbsp; Today’s monetary conditions are the opposite: the Fed is selling, not buying bonds issued by the U.S. Treasury, so the “save” used last time around is no longer available.
  3. The market is still well above its “rising trendline” which is the thin straight line going up the top part of the chart, underneath the historical prices. This is a “line in the sand” that technicians watch as part of assessing the major trend.&nbsp; Right now, it is still very much intact.&nbsp; But that said, it is more than a 15% drop in S&amp;P 500 price to get to that level, just to test it.

Where do I come out on all of this?&nbsp; Well, it’s just one chart, but it’s a biggie.&nbsp; And it is monthly prices, so it is very slow-moving.&nbsp; But I see strong potential for a changeover from bull market conditions to bear market conditions.&nbsp; And unlike some investors, I am not waiting around for another 15%-20% hit to my portfolio’s value before making adjustments to my strategy.&nbsp; This is not a time to panic, and not a time to be a hero.&nbsp; But it is time to face the reality that the stock market, and indexing strategies in particular, are as vulnerable as they have been at any point in the past 20 years.&nbsp; That calls for a far more flexible (i.e., less rigid) approach to investment management in the months and years ahead.

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Source: AdobeStock

Source: AdobeStock

Source: Barchart.com

Source: Barchart.com

The hysteria surrounding cryptocurrency is alive and well, but while speculators obsess about that space of the investment world, I have my eyes on something that is far more critical to those whose hard-earned wealth is more correlated to the fate of the stock and bond markets.  Above is what I’d call the really, really, REALLY big picture for the U.S. stock market.  It covers the last 20 years of the S&P 500, updated through February 14, 2018.  My observations are threefold:

  1. We are literally in “un-charted” territory. During the heights of the market pre-financial crisis, the index stopped rising at around the same point it did during the dot-com bubble.  This time around, that old high from 2007 has been left in the dust.  That makes the analysis a bit tougher in determining just how dangerous this latest potential bull market peak can be.
  2. The bottom of the chart shows the “Percentage Price Oscillator” for the S&P 500 using monthly prices. You can see that it has reached a level similar to that of the late 1990s and the 2007 market top.  But as we see, this indicator also reached this level in late 2015, which led to a sharp but limited selloff into early 2016, before the Federal Reserve pumped more money into the economy and staved off what appeared to be the end of the long bull run.  Today’s monetary conditions are the opposite: the Fed is selling, not buying bonds issued by the U.S. Treasury, so the “save” used last time around is no longer available.
  3. The market is still well above its “rising trendline” which is the thin straight line going up the top part of the chart, underneath the historical prices. This is a “line in the sand” that technicians watch as part of assessing the major trend.  Right now, it is still very much intact.  But that said, it is more than a 15% drop in S&P 500 price to get to that level, just to test it.

Where do I come out on all of this?  Well, it’s just one chart, but it’s a biggie.  And it is monthly prices, so it is very slow-moving.  But I see strong potential for a changeover from bull market conditions to bear market conditions.  And unlike some investors, I am not waiting around for another 15%-20% hit to my portfolio’s value before making adjustments to my strategy.  This is not a time to panic, and not a time to be a hero.  But it is time to face the reality that the stock market, and indexing strategies in particular, are as vulnerable as they have been at any point in the past 20 years.  That calls for a far more flexible (i.e., less rigid) approach to investment management in the months and years ahead.

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