In this past weekend’s missive I wrote:
“Speaking of low volatility, the market has now gone 108-trading days without a drop of 1% for both the Dow and the S&P 500. This is the longest stretch since September of 1993 for the Dow and December of 1995 for the S&P 500.
The issue becomes, of course, which way the market breaks when volatility returns to the market. Over the course of the last three years, in particular, those breaks have been to the downside as shown below.”
“Given the particularly extreme overbought condition that currently exists, the strongest odds suggest the next pickup in volatility will be in the form of a corrective action to reverse some of that condition.”
Of course, on Tuesday afternoon that long streak of complacency came to an end as all major U.S. markets tumbled by more than 1% by the close.
While such an event has been expected, it still seemed to catch investors by surprise. Of course, given such a long period of upwardly trending prices with exceptionally low volatility, investors had been lulled into very high levels of complacency. The media had also fallen into the trap, as noted by the graphic above, suggesting the one-day correction had been a major mean reverting event.
As shown in the chart above, updated through Thursday, all indicators remain extremely overbought. While the markets may indeed rally into Friday’s close, it is quite likely the correction that began on Tuesday is not complete as of yet.
Furthermore, after such a long period of low volatility, the sharp decline in asset prices is one day FELT much worse than it actually was.
This is the important, and often missed point about “passive indexing.”
While a 10% decline in the market certainly does SOUND that bad, with a 2000 point loss on the Dow, or a 230 point loss on the S&P 500, FEELS entirely different. This is where investors start making emotionally bad investment decisions where “passive investing” ultimately becomes “panic selling.”
It is the “lack of perspective” by investors that eventually lead them into the myriad of investment mistakes which destroys investment capital. Think about it this way. If a 1% decline causes this much angst in the market, what happens when you multiply that by 10?
While it is often said it is only “time IN the market” that matters, investors must remember “time” is the one commodity we can not replace.
Just some things I am thinking about this weekend as I catch up on my reading.
- The American Dream: An Endangered Ethos by Danielle DiMartino-Booth via Money Strong
- Time To Kill “Obamacare Lite” by David Stockman via Daily Reckoning
- Fed Rosengren Is Worried About CRE by Wolf Richter via Wolf Street
- Economy Sounding An Alarm by Pedro Da Costa via BI
- Trumps Plans May Need Foreign Help by Evelyn Cheng via CNBC
- How A Rate Hike Affects Borrowers & Savers by Jeff Cox via CNBC
- What You Should Know About The Fed by William Greider via The Nation
- The Surge In America’s “Animal Spirits” by Mohamed El-Erian via Project Syndicate
- Why The Fed Paid Banks NOT To Lend by Caroline Baum via MarketWatch
- Yellen Ignoring TBTF Is Dangerous by Craig Wilson via The Daily Reckoning
- 4-Political Risks Keeping Goldman Up At Night by Tyler Durden via Zero Hedge
- Why Trump Thinks Passing AHCA Bill Is Sensible by Jonathan Chait via New York Magazine
- Rate Hikes + Low Growth = Recession by Mark DeCambre via MarketWatch
- 2% Growth As Good As It Gets by Jason Furman via Peterson Institute
- Field Of Stock Market Dreams by Eric Parnell via Seeking Alpha
- Age Old Adages For The Bull Market by Ed Yardeni via Dr. Ed’s Blog
- Credit Suisse: Signs Of A Top by Akin Oyedele via BI
- Return Of The Risk Off Trade by James Picerno via Capital Spectator
- Forget The Health Bill, Damage Is Done by Tyler Durden via Zero Hedge
- Big Money Eyeing Stock Market Exit by Brett Arends via MarketWatch
- Here’s Why Oil Prices Are Crashing by Jeff Bukhari via Fortune
- Has OPEC Underestimated U.S. Shale by Tsvetana Paraskova via Oil Price.com
- Animal Spirits Not Fueling The Markets, Yet. by Jeffrey Bartash via MarketWatch
- A Return To The Permanent Portfolio by David Merkel via Aleph Blog
- Black Swan Gauge Suggests Caution by Mark DeCambre via MarketWatch
- Why You Should Be Short Financials by Doug Kass via Real Clear Markets
- Stock Market Is Too Quiet by Anthony Mirhaydari via Fiscal Times
- Record Number Of Investors Think Market Overvalued by Jeff Cox via CNBC
- U.S. Stock Market Is An Anomaly by Wesley Gray via Yahoo Finance
Research / Interesting Reads
- Housing “Supply Shortage” Is #FakeNews by Mark Hanson via MHanson.com
- Ray Dalio: The Rise Of Populism by Ray Dalio via BridgeWater
- 7-Traits Of Successful Investors by Jim O’Shaughnessy via Tumblr
- The Incredible Shrinking Universe Of Stocks by Credit Suisse
- Robots: The 4th Industrial Revolution by David Kelnar via Medium
- The Man Behind The Trump Presidency by Jane Mayer via The New Yorker
- 4-Depressing Reasons Americans Don’t Save by Maria Lamagna via MarketWatch
- The Battle Of Personal Assistants On Your Phone by Hayley Tsukayama via Washington Post
- Why Wall Street’s Decline Won’t End by Nicole Gelinas via NY Post
- You Should Worry About Falling Car Prices by Edward Harrison via Credit Writedowns
- Does Anybody Eat Cereal For Breakfast? by Paul La Monica via CNN Money
- Bonds Will Outperform Stocks Over Next Decade by John Hussman via Hussman Funds
- Traders Aggressively Trim Their Hedges by Dana Lyons via Tumblr
- Bogle’s 4% Return Estimate May Be Optimistic by Jesse Felder via The Felder Report
“Successful preservation of capital must overcome the handicaps of socialistic governments to supposedly help the masses.” – Gerald Loeb
Questions, comments, suggestions – please email me.
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