Trend

A 28 year client called in last week and said to me (verbatim)…

“Rick, I read all your shiny happy Marketmails. I listen to you on calls and during in-person reviews. 
And I get it…..over time, being optimistic pays off. 
But stop blowin’ sunshine up my @#$ and tell me what might actually make you worry……..even a little bit!”

And it’s a legit question. I basically earn a living every day in part by worrying constantly on behalf of my clients. Day in and day out, I am looking for blind spots in financial plans and portfolios. The sneaky unnecessary pieces of risk that I can try to weed out of a client’s life. Because if I worry about the bad stuff, then the good stuff tends to just take care of itself.

But what would worry me somewhat would be if the longer-term market trend changed from positive to negative. While it is hard to define that exactly, for about 30 years I have used the same definition. Bear with me on the finance geek stuff here for a second, but generally I would worry about the trend if the S&P 500’s 10-month moving average crossed below the 20-month moving average (“10ma/20ma” for short). This 10ma/20ma comparison is not some complex secret. No magic black box stuff here. You can run it and track it on a multitude of free online charting websites yourself. The 10ma/20ma is intentionally slow moving, so it rarely changes direction. If you have questions about it, just call me and I will help you.

In general, looking back historically, a 10ma/20ma crossover has communicated information about the general trend (higher or lower) of the markets. It absolutely never has, and never will, tell anyone where the top or bottom is in a market. Far from it. And it cannot predict the future with great accuracy. Instead it is more of a general barometer of market health. And while it is firmly positive now, if it were to cross over to negative, it would push me to dust off my defensive playbook for portfolios.

I follow a portfolio management process with great discipline. It is one I have honed over the last 30 years. There is a time-tested structure which underlies my decisions. And while playing offense is a lot of fun, at times the harder work of playing some defense is necessary.

The views expressed herein are those of the author and do not necessarily reflect the views of Raymond James & Associates or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.

The Standard & Poor's 500 Index is a market capitalization weighted index of the 500 largest U.S. publicly traded companies by market value. 

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