Well, that was quick.
Just six trading sessions ago (the Friday before last), the S&P 500 set its most recent all-time high. As we’ve pointed out several times, other parts of the stock market haven’t been as strong — notably smaller-company stocks never have eclipsed their highs from last August. But the S&P 500 and Nasdaq indexes were at all-time highs less than two weeks ago.
Now, as I write this, the S&P 500 is down around -6% from those highs, with more than half of that coming today.
On days like today, it’s helpful to remember that 5% market corrections are a relatively common event. Market researcher Charlie Bilello reminds us that this is the 25th correction of at least 5% since this bull market began in March of 2009.
The S&P 500 is down 5.2% from its high on July 26. This is the 25th correction >5% since the March 2009 low. They all felt like the end of the world at the time. $SPX pic.twitter.com/Q1Tm8ZOg7d
— Charlie Bilello (@charliebilello) August 5, 2019
The ping-pong match between President Trump and Fed Chairman Powell continues, with stock investors playing the role of the ball getting whacked back and forth. Crack! — New escalation in the trade war with China sends stocks plummeting. Whack! — Powell responds with rate cut promises, the market soars back. Back and forth over the net we go.
The net effect is a stock market that has set several new highs, at least when measured by the S&P 500, yet is now trading below the level of its January 2018 peak. That’s a year-and-a-half of going nowhere. Thankfully, at least SMI investors have Dynamic Asset Allocation buffering these abrupt losses: DAA as a whole looks to be down about -0.3% at this point today, whereas the S&P 500 is down -3.4%. When the direction of the market stays pointed lower for more than a few days, weeks, or even months like we saw late last year, we’ll be glad to have that downside protection.
Ultimately, we know that eventually one of these pullbacks will become a -10% correction, and eventually morph into a full-blown -20% bear market. But that’s been the worry at this stage of every one of the prior 24 pull-backs listed in the chart above too. SMI’s systems are built to monitor and gradually respond to these trends as they unfold. That’s why two of DAA’s three holdings are up significantly even as stocks fall today. Risk protection has been rising, even as the S&P 500 index has projected the illusion that all is well.
So for now, keep following the system, and stick with your long-term plan. The time to snap to attention is going to be when Fed Chairman Powell takes a healthy swing at the ball and the market doesn’t respond. It’ll happen eventually, but it hasn’t happened yet. When it does, rest assured SMI’s mechanical systems and defensive protocols will be standing by. At this point, the Fed’s interest rate cuts have only just begun, suggesting there will likely be more back-and-forth before this ping-pong match is decided.
