The Incredibly Important Big Picture
THE VIEW OF THE STOCK MARKET THAT IS RARELY TALKED ABOUT
“Sound strategy starts with having the right goal.”
The current leg of the NASDAQ's rally began on February 11, 2016 or 907 calendar days ago. The NASDAQ made a new all-time high on July 25, 2018 and then fell sharply for 3 days. Many were saying the tech-led rally was coming to an end. While that may turn out to be the case, a 3-day drop has almost no impact on the math related to a trend that began 907 calendar days ago. As shown below, the really big picture for the NASDAQ still tells us to remain open to much better than expected outcomes in the coming years.
WHY EVERYTHING YOU KNOW ABOUT ASSET ALLOCATION IS ABOUT TO CHANGE
In this week's stock market video:
- The single best signal.
- Your pie chart may disappoint in the next 20 years.
- My bonds seem to be acting differently.
- The lure of past balanced portfolio performance.
- Has diversification worked well in 2018?
- It’s all we know (recency bias).
- Haven’t seen anything like this in 35 years.
- The market has changed and we may have to adjust significantly.
- The real world 1926-2018 vs. perceptions.
- Is bullish momentum waning?
- Should we be concerned about breadth?
- But, we are near all-time highs.
LONG-TERM BREAKOUT IS HOLDING
A common bearish argument says the stock market is being led by only 4 or 5 major stocks. The chart below clearly demonstrates the average stock is participating in the current bull market. The Value Line Geometric Index contains approximately 1,700 stocks and is equally-weighted. The index recently broke above levels that acted as resistance in 1998, 2007, and 2017.
THE END OF THE NORMAL CORRECTION IN STOCKS?
While the S&P 500 has yet to recapture the highs made in January, many other major indexes have pushed to new all-time highs, including the broad Wilshire 5000 Index as noted by Mark Hulbert on MarketWatch.
Why Everything You Know About Asset Allocation Is About To Change
In this week's stock market video:
- The single best signal.
- Your pie chart may disappoint in the next 20 years.
- My bonds seem to be acting differently.
- The lure of past balanced portfolio performance.
- Has diversification worked well in 2018?
- It’s all we know (recency bias).
- Haven’t seen anything like this in 35 years.
- The market has changed and we may have to adjust significantly.
- The real world 1926-2018 vs. perceptions.
- Is bullish momentum waning?
- Should we be concerned about breadth?
- But, we are near all-time highs.
Overthinking Singular Outcomes
BREAKOUTS CAN SUCCEED OR FAIL
We all want a clean breakout and then a push higher. Unfortunately, that is not how it always plays out in the real world. A successful retest of a breakout attempt can (1) drop back and stay above the orange boxes, (2) drop back to the orange boxes, or (3) drop back into the orange boxes before pushing higher. On a successful retest, the important common factors are (a) breaking out, (b) dropping back toward the box in some fashion, and (c) making a higher high above the most recent previous high. In the real world, there is no neat textbook definition about what a successful breakout looks like.
ONE EVENT vs. WEIGHT OF EVIDENCE
Since, in the short run, it will have little impact on the bigger (and much more important) picture, experience says overthinking breakouts tends to be a distraction. No single event makes up the weight of the evidence, including the outcome of a breakout attempt.
SO FAR, SO GOOD
Heading into Wednesday’s session, the breakouts on both versions of the S&P 500’s daily chart are holding. All things being equal, bulls would prefer to see them hold. However, if they fail, it will not significantly alter the bigger, and still constructive, longer-term outlook.
These comments apply to our approach and our timeframe.
“We cannot solve our problems with the same thinking we used when we created them.”