As noted on March 24, the stock market has been in a volatile sideways pattern for nine months.
Our approach is concerned with being properly allocated for the next big move (7% to 30%), rather than the next small move within an ongoing series of whipsaws (2%-4%). Therefore, it is best to remain as patient as possible within the context of the model/rules until the market begins to more clearly tip its hand, either to the upside or downside.
Managing Based On Facts, Rather Than Fear
It is uncomfortable for all human beings when markets are weak. However, decisions based on fear or the desire to reduce short-term anxiety tend to hurt long-term performance. Significant damage to portfolios can occur during prolonged stock market corrections and bear markets. Significant damage does not occur in a few days or within a trading range (see last nine months).
Correction/Bear Not Possible Without A Lower Low
We know with 100% certainty that a three-month correction or three-year bear market cannot begin until the S&P 500 makes a lower closing low below 2039 (see chart below). Therefore, as long as the S&P 500 remains above 2039 (on a closing basis), some patience remains in order.
Click here for a larger version of the chart above.
Ugly Markets Can Rally
Q: Why should we remain patient? A: It is possible that the S&P 500 never closes below 2039 and instead rallies 20% in a bullish fashion. It is easy to take a weak market and extrapolate to the downside. It is much harder to remain prudent and patient. Under our system, there is no need to guess, forecast, or anticipate based on fear.
Rules Require Weekly Review
Regardless of where the S&P 500 is trading late in Friday’s session, our rules require that we check our allocations before the end of the week relative to the hard and observable evidence tracked by the market model. A Friday close below 2039 would most likely require some type of defensive action, but the facts will govern our actions.
The More Important Levels
As noted in a recent video (view clip), the pink, orange, and green lines (1988, 1980, & 1972 below) are the more important bull/bear lines of demarcation.
If and when action needs to be taken to protect our hard-earned capital, we will take action based on the rules, without hesitating. If the facts and rules call for patience, we will continue to be patient.