by Daniel Carter
The last year has been an absolutely wild ride for stock prices. If you are a long-term investor, which I hope you are, there may not have been a point so turbulent to induce you to sell all your stocks. After all, if you’ve been holding stocks for years, you’re still up big. However, we may be approaching a time period where years of returns could be erased within months. And that’s not a bold statement considering the stock market carnage we’ve seen in recent history.
The bursting of the dot com bubble (2000) and the subprime mortgage bubble (2008) showed us how wealth can vanish in a moment’s notice.
Sven Henrich (aka The Northman Trader) put together a fantastic visualization that shows how this time period is looking ominously similar to 2000 and 2008. The chart below shows “confluence”, meaning that multiple indicators are aligning to paint a definitive picture. RSI has hit 50 after being overvalued and sloping downward. Price has broken, and is now retesting, the long-term trendline. MACD has peaked and is now reversing trend. The unemployment rate is bottoming. And, TNX (10yr Treasury yield) is sloping downward. All of this happened before the last two major stock market crashes.
There are more ominous signs for the stock market as well. Take a look at the volatility chart below. It is currently finding support at its 200-day moving average. And, when volatility finds a bottom, it can rise sharply higher in the blink of an eye. We saw this at the beginning of 2018, which coincided with an almost 10% decrease in the S&P 500.
The Baltic Dry Index (BDI), which is a good indicator of the health of global trade, is showing us something interesting and worrying about the stock market as well. As you can see from the chart below, the BDI has led the S&P 500 with impressive accuracy over the past year. It has recently crashed yet again, while the stock market continues to climb higher. Will the stock market follow the BDI lower this time?
But even if the stock market is setting up for a crash, the crash may or may not be imminent. Danielle DiMartino, a former Federal Reserve insider, reminds us that bear market rallies can last up to 5 months. We’re still only two months into the current rally.
Our research found that bear market rallies can persist for up to 5 months after unemployment rate has bottomed. But that doesn’t make them bull runs. We ran data back to postwar era, FYI.
— Danielle DiMartino (@DiMartinoBooth) February 2, 2019
Most indicators are telling us that we are at the end of the economic cycle. And that usually means a major stock market selloff. In fact, this current rally appears to only be a typical bear market rally; a sharp increase in prices, but very temporary. Even if you are a long-term investor, it’s important to consider protecting your wealth during time periods such as these. But, as always, don’t take my word for it. Do plenty of your own research and/or consider talking to a finance professional.