Is a New Bear Market Upon Us?
Greetings! In my last few market update video posts I've been showing a chart that looks like this:
This chart is of the S&P 500 over the past year. As you can see, while it has been going mostly up, it has done so with quite a bit of volatility and has recently started falling. As of 11/13/2012 the market is right where it was 8 months ago having given back roughly 7.5% of gains.
While still up for the year, many are wondering if this latest drop is a precursor for something bigger. Perhaps another full fledged bear market?
In my video commentaries I've been pointing out the significance of the market staying above the smoothed red line on the chart. That line represents the 200 day moving average (sum of last 200 market days divided by 200). The 200 day average is a trend line that helps show the general direction of the market is a much less volatile way than watching the daily price.
As of last week Friday the S&P 500 fell below its 200 day average and has stayed below for 3 days.
But what does it mean, and why is it important?
Looking back at the 62 years of data on the S&P 500 there have been a total of 15,819 market days. Of those, the market has been trading above its 200 day average 10,947. Basically trending up the majority (70%) of the time.
With some elementary math we also can see the market has traded below its 200 day average 4,872 days, or about 30% of the time.
Now, unless you're a major geek like me, I might be losing you. So here's the significance of all this:
When the market trades above its 200 day average the returns are 5x greater than when it trades below its 200 day average. And, every single major market decline (20% or greater) was precluded with the market falling below its 200 day average.
Here's a chart showing the difference. In the chart I refer to the market being above the 200 day average as "not bad" and below the 200 day average as "bad" (yeah, I know, very clever terminology).
So this is a big deal.
That said, it's not the end of the world. In fact, as you can see in the bar chart the market still averages a slightly positive return even in "bad" times. If anything the fact the market is officially in "bad" territory should serve as a warning and notice. A warning that a very real market decline could be looming, and a warning that even if it doesn't return expectations should be very modest.
On the bright side, every great bull market has happened after a bear. So if you can maintain what you have in dicey markets like we have right now you should be in great shape to capitalize on that at some point in the future.
I'll keep a close eye on the market for all clients and blog readers. As soon as I see reason to completely eliminate stocks/growth investments from a portfolio it will be posted. Until then my philosophy isn't changing much - the best way to navigate markets right now is to keep a conservative, balanced portfolio.