Daddy…What Is a Downtrend? And Learn It, Know It, Live It!

The New York Times (the Styles section no less) is telling investors to ‘assume the crash position’.

If the Styles section is weighing in on the markets, we may not be near a bottom, but we are definitely in a downtrend.

Right now 68 percent of S&P stocks are below their 200 day moving average.

The Nasdaq might be worse (even though it is still up in 2018), a whopping 80 percent of stocks are below their 200 day moving average.

I have no idea what this downtrend brings next or when a new uptrend might begin. Nobody does.

What I do is look for signs. There are no stocks making all-time highs right now, so my cash level remains very high.

History helps as a guide so I look at a lot of charts from previous downtrending markets.

I remember 2008 well.

The selling was relentless and the rallies were spectacular.

Brian Shannon summarizes it best with this one chart:

Even in the horrific downtrend and bear market of 2008, there were NINE S&P rallies of nearly 10 percent and THREE rallies of greater than 20 percent.

That market required in credible discipline and patience.

If you were sucked into one of the big rallies, you were wrecked weeks later.

I think in terms of probabilities and based on the price action I am seeing, the probability we go lower the next few months is high.

I like this insight from JC about the weakness and probability of lower prices ahead:

If the regional bank index, transportation index & semiconductor Index (among many others) are all below their Q1 lows, why should we not expect the Dow & S&P to do the same?

The markets are doing their job nauseating all the fresh Coinbase and Robinhood active investors.

If you really fancy yourself an active investor, get used to investing through downtrends.

PS – If you are an active investor like me, I suggest you read this great piece from Jim O’Shaughnessy titled ‘Successful Active Stock Investing is Hard: Here are Seven Traits that I Believe are Required for Active Investors to Win in the Long Term‘.

Learn it, know it, live it.

Also published on Medium.