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The Great Bear Market Of 2018 – 02-16-18

Written by Lance Roberts | Feb 17, 2018
, The Great Bear Market Of 2018 – 02-16-18PRINTER FRIENDLY VERSION

, The Great Bear Market Of 2018 – 02-16-18

  • Bear Market Of 2018
  • The Real Bear Is Still Coming
  • Remaining Bullish For Now
  • Rebalancing Suggestions
  • Sector & Market Analysis
  • 401k Plan Manager

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, The Great Bear Market Of 2018 – 02-16-18

The Bear Market Of 2018

Let’s start with where we left off last weekend:

“Currently, we do not know whether the current corrective action is JUST a normal, healthy correction, or the beginning of something bigger.

BUT – this is the expected correction we have been discussing over the last several weeks. It is also something we had planned for by reducing overweight positions and adding a short-hedge to portfolios. 

With the markets on a short-term sell signal (noted by black vertical dashed lines in the chart above,) the current correctional process is underway. But, with the market now oversold on a VERY short-term basis a counter-trend rally over the next week, or two, should be expected.”

Well, we did indeed get a very nice rally last week with the market breaking above the 50-dma on Thursday.

, The Great Bear Market Of 2018 – 02-16-18

While the immediate consensus is the “bear market of 2018” is now over, there are several important points about the chart above that should be considered.

  1. Despite the correction, the market did hold support at the 200-dma
  2. The bullish trend line, which goes back to the beginning of 2016, has also not been violated.
  3. However, the upper red “trendline” may provide some overhead resistance temporarily and is worth watching closely. 
  4. While the market did get oversold on a short-term basis, which suggested a bounce was likely, the longer-term overbought condition, and subsequent “sell signal” remain intact. 

The bottom line is that while there was much “angst” in the markets last week, the market has not violated any important trend lines that would suggest the current sell-off is anything more than just an ordinary “garden variety” correction. 

But, I wrote:

“The larger concern currently, is the ‘sell signal’ which has been triggered at abnormally high levels and remains in extremely overbought territory. Such suggests there remains ‘fuel’ for either a ‘deeper correction’ or a ‘consolidation’ of the markets in the weeks ahead to ‘work off’ that ‘overbought’ condition. Historically, markets don’t resolve such conditions by trading ‘sideways.’” 

While we are watching that closely, it certainly doesn’t mean the market can’t rally higher from here. In fact, with the markets clearing the 50-dma on Friday, the upper-trend line and old highs are currently the only real resistance.  With markets not yet back to “overbought” conditions, it is certainly possible for the market to rally further next week.

The greenish triangle shows the path of the accelerated bullish trend that began last August which currently remains the most likely path for now.

, The Great Bear Market Of 2018 – 02-16-18

While the “Great Bear Market Of 2018” may indeed be behind us, it did NOT resolve the longer-term overbought, overvalued and overbullish conditions for investors.

The Real Bear Is Still Coming

The good news, for those who remain ever bullishly inclined, is on a long-term, monthly basis, the bull market remains intact for now.

Unfortunately, despite the rather harrowing correction, little was done to relieve any of the underlying pressures.

  • Valuations still remain elevated
  • Bearishness and volatility, despite the recent spike, remain at historically low levels, and;
  • Investors simply could not jump “back” into the markets fast enough.

These are not signs of a real, lasting bottom, which long-term investors should aggressively buy into.

Given the current extension of the market, and the deviation between the current price and long-term average, a real reversion to the mean is still coming. If you thought the 10% decline over the last two weeks was painful, you should be reconsidering the risk you are currently carrying in your portfolio. 

, The Great Bear Market Of 2018 – 02-16-18

More importantly, as denoted by the red circles, the market is currently trading 3-standard deviations above the long-term average. This has only happened a few times in history and has generally preceded a rather deep correction in the not too distant future.

When will that be?

I don’t know.  Nor, does anyone else.

But, we have seen this type of action before.

, The Great Bear Market Of 2018 – 02-16-18

, The Great Bear Market Of 2018 – 02-16-18

If you don’t recognize those charts, they are 2000 and 2007 respectively.

Each initial correction was followed by a rally to new highs which convinced investors the “bull market” would never end.

But you should already know the rest of the story.

The only thing more dangerous to investors long-term outcomes than being overly optimistic, is ignoring history. 

Remaining Bullish For Now

As we stated last week, the “odds” favor the “bulls” currently because:

  1. Bull markets last longer than bear markets
  2. Bull markets are hard to break
  3. Bull markets can defy logic longer than most anticipate

But bulls, like bears, are only right half the time.

Unfortunately, when the “bulls” are wrong – they are “really wrong,” and the long-term damage to capital is irreparable.

This is why we maintain a focus on the “trend” of the market for maintaining portfolio allocations. When markets begin to break down, or change trend, and the risk of loss outweighs the potential for reward, we become aggressively defensive.

Currently, such is NOT the case, as the bullish trend remains intact. 

The chart below shows the weekly view of the S&P 500 index going back to 2014.

, The Great Bear Market Of 2018 – 02-16-18

(We will provide all our specific indicators to subscribers at RIA Pro, click here to get on our list for pre-subscription information)

Since this is a weekly indicator, a strong rally, or decline, mid-week can REVERSE a signal. While the “1st sell signal” is still getting closer, the rally this past week kept it from triggering, for now.

As I detailed last week:

  • The first of the two is simply an “ALERT” signal which suggests investors should “pay attention” to their risk related allocations and rebalance those risks accordingly. 
  • When both lower signals are triggered, a confirming signal, such has generally been a good indication to more proactively reduce allocations, raise SOME cash, and further reduce risk related exposure.

Currently, the market has not violated the accelerated bullish trend nor the bullish trend support levels from the pre-2016 correction advance. With nothing more than just an “alert” signal at this point, there is little to do portfolio wise, except rebalance and reposition risk as discussed below.

Importantly, we are not trying to “guess” at what the market “will do,” we are simply “reacting” to what it “does do. “

The trend is still bullish and we remain long….for now.

That will eventually change, and, as indicated by the green boxes, if it does we will act accordingly reducing risk, raising cash and hedging further as we have done previously during those specific periods.

While we remain on “alert” status currently, the recent correction was nothing more than a much-needed correction within a very extended bullish trend.

Rebalancing Suggestions

It may be time for investors to rethink levels of risk exposure in their portfolios currently.

As I stated at the end of December, we reduced exposure in portfolios by raising cash, adding hedges and rebalancing portfolios back to target weightings.

As noted above, given the sharp sell-off, and subsequently sharp rally over the last couple of weeks, it is prudent to rebalance portfolio risks. Here are some guidelines to think about.

Step 1) Clean Up Your Portfolio

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Take profits in positions that have been big winners
  3. Sell laggards and losers
  4. Raise cash and rebalance portfolios to target weightings.

Step 2) Compare Your Portfolio Allocation To Your Model Allocation.

  1. Determine areas requiring new or increased exposure.
  2. Determine how many shares need to be purchased to fill allocation requirements.
  3. Determine cash requirements to make purchases.
  4. Re-examine portfolio to rebalance and raise sufficient cash for requirements.
  5. Determine entry price levels for each new position.
  6. Determine “stop loss” levels for each position.
  7. Determine “sell/profit taking” levels for each position.

(Note: the primary rule of investing that should NEVER be broken is: “Never invest money without knowing where you are going to sell if you are wrong, and if you are right.”)

Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are looking for a retest of the 50-dma to confirm the recent recovery.

Stay alert…I have a sneaky suspicion we are not out of the woods just yet.

See you next week.

Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders

S&P 500 Tear Sheet

, The Great Bear Market Of 2018 – 02-16-18

Performance Analysis

, The Great Bear Market Of 2018 – 02-16-18

ETF Model Relative Performance Analysis

, The Great Bear Market Of 2018 – 02-16-18

Sector & Market Analysis:

As expected, the markets did indeed bounce last week. But the bounce was not uniform across all sectors and markets, so let’s take a closer look.

, The Great Bear Market Of 2018 – 02-16-18

Discretionary, Technology, Industrials, Health Care, and Financials each regained their respective 50-dma which sets these sectors up for a retest of their old highs. However, after a very sharp reversal, these sectors are quickly becoming extended which suggests this is a good time to rebalance portfolio weights.

Materials, Energy, Staples, and Utilities performed substantially worse raising concerns over their positioning. We will be watching for failed rallies next week to reduce holdings in this sectors and underweight them in portfolios for the time being.

, The Great Bear Market Of 2018 – 02-16-18

With the exception of Emerging Markets and Gold, the 50-dma provided formidable resistance to the broader markets. We will need to see some further improvement next week, or we will likely see another bout of selling in the markets short-term.

Bonds and REITs appear to be attempting a recovery, along with the markets, we will look to underweight holdings on any failed rally to resistance.

As a side note, interest rates remain GROSSLY oversold which sets interest rate sensitive shares up for a very nice counter-trend rally. If we see a weakening in the economic or inflationary data over the next several weeks, such could lead to a fairly rapid reversal.

Sector Recommendations:

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

, The Great Bear Market Of 2018 – 02-16-18

Currently, HOLD, all positions until we get a better understanding of the current correction as noted above. I will update strategy and actions on Tuesday. 

Portfolio Update:

We previously, added to our short hedge when the market failed at the 50-dma.

We then sold that added position when the market found support at the 200-dma.

We will now look to do the following next week:

  • Rebalance positions to target weights, based on allocation models, if the market holds above the 50-dma.
  • Remove remaining hedges.

As we stated two weeks, this market has a lot of work to do over the coming week. Furthermore, there is a risk the recent rally was only the first part of a corrective process so we remain vigilant. Currently, everything remains within our longer-term tolerance bands for risk controls. While corrections certainly do not “feel” good, it is important we don’t let short-term pickups in volatility derail longer-term investment strategies.

The market rally last week quickly relieved a lot of the pressure on positions which gives us time to logically think about our next set of actions. As stated above, we are highly concerned about remaining market risk and remain focused on capital controls.


The Real 401k Plan Manager – A Conservative Strategy For Long-Term Investors

, The Great Bear Market Of 2018 – 02-16-18

There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.

, The Great Bear Market Of 2018 – 02-16-18

Remain Patient

As I wrote last week:

“Keeping perspective is always important. The current correction has only retraced to the top of the longer-term upper bullish trend line. As I have discussed previously, the massive extension above the longer-term trends HAD to be corrected.”

Furthermore, BOTH of the lower indicators remain firmly on ‘buy’ signals which keeps allocations weighted to the long-side.”

While the recent correction could have been, and potentially still could be, the beginning of a larger corrective process, so far it hasn’t been the case. As I laid out in the main body above, the actions of the market over the next week, or two, will determine our next major course of action.

For now, remain patient. It is too early to begin layering on additional risk until we have confirmation the recent correction really is over.

The hedging we have been repeatedly suggesting paid off by reducing overall volatility. For now, continue adding All NEW contributions to cash or cash equivalents like a stable value fund, short-duration bond fund or retirement reserves. We will use these funds opportunistically to add to weightings when the market decides where it is headed next.

If you need help after reading the alert; don’t hesitate to contact me.

Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

, The Great Bear Market Of 2018 – 02-16-18

401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don’t see your exact fund listed, look for a fund that is similar in nature.

, The Great Bear Market Of 2018 – 02-16-18


























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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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