This Market is Not Normal
It is normal for the stock market to have setbacks, on a regular basis. Usually, the stock market always goes through a garden variety 5% or 10% correction, even during strong years. Declines of this magnitude occurred in 2016, 2015, 2014, 2013, 2012, etc. Sometimes these declines happen more than once. But, this year is different. So far, we have not even had even a mere 3% decline since the election last fall. This is very abnormal, even unprecedented.
Given this abnormality, what will happen when the market does finally fall by a decent amount? Inevitably, it has to happen.
When a market decline finally happens, we would want our client assets to be properly cushioned from the damaging effects. For example, let’s say you have a portfolio of 500k and it is 80% invested in equities. A normal, 10% decline in the S&P 500 would mean a 40k decline in the value of this portfolio. None of our clients that would want to endure a decline of this magnitude. Furthermore, in the midst of a downturn in the stock market would be the accompanying concern that a 40k loss could turn into an 80k or even a greater amount if the market were to fall further.
Market declines always spawn fear amongst investors of worse outcomes materializing. Effective asset management minimizes the impact of a market decline and presents an opportunity to buy at the bottom.
This is why it is important to avoid to the teeth of a market decline and watch for the markings that precede such a decline.
There are indicators and behavior characteristics that provide a valuable alert system for investors. These alerts happen before the actual decline happens and that is why it is helpful to notice when these markings show up. They forecast market weakness before the actual decline occurs.
Signals for market tops are processes. Tops don’t happen suddenly. They happen gradually like the “frog in boiling water” analogy. Market tops begin with an increasing number of stocks and sectors entering downtrends even when the general indices hover near their highs. A growing number stocks slip into downtrends and forecast pending market weakness in the broad market. As a greater percentage of the market slumps, a decline in the indexes eventually follows.
So what is happening right now? Even though the market is near all-time highs in every index, warning signs are emerging. We are seeing an increasingly split tape. More pointedly, about one half of the overall market is starting to act like it is topping out. This is our warning signal. It doesn’t mean anything absolute. It just means that the market is not as healthy as it has been over the last few months.
Peregrine Asset Advisers ● 9755 SW Barnes Rd. Suite 295 ● Portland Oregon 97225
503.459.4651 ● 800.278.1420 ● www.peregrineaa.com