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Sunday, February 28, 2021

Corrective Action Isn’t Surprising

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Executive Summary:

Last week, I questioned if the bull case had become a little “too easy” and, in turn, a bit too popular. The implication was that the recent joyride to the upside had become more than a little overdone. Cue some options unwinding, some profit-taking and some forced selling, and voila, a correction/pullback/consolidation/pause ensued. But with our Primary Cycle Board still sporting a lot of green, it is probably best to give the bulls the benefit of the doubt here. The bottom line is the move in many of the poster children had gotten ridiculous and as such, some corrective action isn’t surprising.

The Big-Picture Market Models

Despite the current “tech wreck” playing out in the near-term, there are no changes to the Primary Cycle Board this week. And since the board remains predominately green, my take is that we’re seeing a correction of some of the excesses that had been building up in the high fliers. However, this doesn’t necessarily mean that its the end of the line for the bull train and I contend that a buy-the-dip strategy remains warranted.

Primary Cycle Board.

Primary Cycle Board.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability.

Checking In On The “Primary” Cycles

While I don’t often make portfolio adjustments based on the long-term trends in the stock market (aka the primary cycles), I have found over the years that checking in on the state of the cycles and the weekly/monthly charts helps to keep the big-picture in perspective.

Primary Stock Market Cycles.

Primary Stock Market Cycles.

Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability – NOT INDIVIDUAL INVESTMENT ADVICE.

The Secular Market Cycle

Definition: A secular bull market is a period in which stock prices rise at an above-average rate for an extended period (think five years or longer) and suffer only relatively short intervening declines.

A secular bear market is an extended period of flat or declining stock prices. Secular bull or bear markets typically consist of multiple cyclical bull and bear markets.

Below is a monthly chart of the S&P 500 Index illustrating the current cycle, which we estimate began on March 9, 2009.

S&P 500 – Monthly

S&P Monthly Chart.

S&P Monthly Chart.

The Cyclical Market Cycle

Definition: A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify.

A cyclical bear market requires a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days. Reversals of 30% in the Value Line Geometric Index also qualify. Below is a weekly chart of the S&P 500 illustrating the current cycle, which we estimate began on March 24, 2020.

S&P 500 – Weekly

S&P 00 Weekly Chart.

S&P 00 Weekly Chart.

Thought For The Day:

Life is change. Growth is optional. Choose wisely.
-Unknown

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