The last 6 months of 2021 look eerily similar to the 6 months prior to the pandemic crash. What to look for next.
When you have charted stocks for 40 years, you can’t help but notice when a pattern you see today reminds you of one you saw in the past. After all, history does not repeat, but it does rhyme. Sometimes that market poetry sings like a favorite song, where you know the words by heart. Other times, it moves you to the edge of your seat, to see if there is more to it. At least one current pattern, that of the S&P 500 Index, is starting to sound more like Phantom Of The Opera than We Are The Champions. That deserves a closer look.
Here is the S&P 500 since late March, a stretch of about 5 1/2 months, through market close on Thursday, September 9. A nice, barely interrupted 15% gain. Happy times.
Now, here is a period of roughly the same length, from October 2019 through February 19, 2020. Another nice, barely interrupted 15% gain. Happy times again.
Congratulations to any investor who was fully-invested in Mega Cap stocks and other investments that have appreciated during this time. The problem, if there is any, is pretty simple: the market “headline” indexes like S&P 500 are masking a gradual deterioration in the technical condition of an increasing portion of the stock market.
Is this a sign that another crash is imminent? Well, if anyone tells you that with any degree of confidence...run the other way! All we can do is gather evidence, see what the weight of the evidence is, and translate that into the “story” the market is telling us at any point in time. Here is what this story appears to be about:
- The stock market is slowly rolling over, piece by piece
- Many parts of the market peaked back in May
- The "headline" indexes like S&P 500 and Nasdaq mask this, hitting "new highs" consistently
That narrowing of "what's working" is a warning sign. Does it mean "watch out below?" Before the era of massive Fed intervention, perhaps. But you never know when some effort to “kick the can down the road” from central banks can delay the inevitable. On a longer-term basis, the business of 2020’s decline is not resolved, despite a 100% rally off the March 23, 2020, low.
The does mean 4 things:
- Know what you own and why you own it
- If you don’t know how to play defense in your portfolio alongside and in sync with your offense, you had better learn quickly, or find someone who does
- Don’t be complacent
- Ignore anyone who at this critical moment in the market cycle, is telling you things like “just hang in there,” “corrections are healthy” and the like. They might just be saying that because of their concerns about how they get paid.
Investing is a long-term process. But those in retirement or approaching it cannot afford to just be reactive. The market environment is not the issue. What is? Having an all-weather approach to whatever market climate comes along. Now, if you’ll excuse me, I need to grab my raincoat.