In this past weekend’s newsletter, I touched on the outcome of the mid-term elections and why it would likely not be as optimistic as the mainstream media was portraying it to be. To wit:
“It is likely little will get done as the desire to engage in conflict and positioning between parties will obliterate any chance for potential bipartisan agenda items such as infrastructure spending.
So, really, despite all of the excitement over the outcome of the mid-terms, it will likely mean little going forward. The bigger issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.”
I also wrote:
“With portfolios reduced to 50% equity, we have a bit of breathing room currently to watch for what the market does next. It is EXTREMELY important the market rally next week above Wednesday’s highs or we will likely see another decline to potentially test the recent lows.”
Unfortunately, on Monday, nothing good happened. While the week is not over yet, the failure of the S&P 500 at the 50-dma now turns that previous support to important resistance. Furthermore, the failure of the market to hold the 200-dma also increases the downside risk of the market currently.
There is an important point here to be made about “bull markets” and “bear markets.”
While there is no “official” definition of what constitutes a “bull” or “bear” market, the generally accepted definition is a decline of 20% in the market.
However, since I really don’t want to subject my clients to a loss of 20% in their portfolios, I would suggest a different definition based on the “trend” of the market as a whole. As shown in the chart below:
The vertical red and green lines denote the confirmation of the change in trend when all three indicators simultaneously align.
Importantly, note that just a violation of the long-term moving average is not confirmation of a change to the ongoing bull trend. Over the last decade, there were several violations of the long-term moving average which were quickly reversed by Central Bank interventions (QE2 and Operation Twist).
