After Monday’s monster 2.72% rally in stocks it did appear that the S&P 500 was finally going to break out and move towards all time highs again. However yesterday’s -1.73% reversal serves as a reminder that the ugliness we’ve seen in the markets in 2018 hasn’t resolved itself as quickly as many investors have become accustomed to in the last couple years. The rule for the past few years has been buy the dip. So much so that it’s often times a Twitter meme and it’s posted thousands of times a day when there is a down day in the markets.
But it’s been 2 months since the markets topped on Jan. 26, 2018 and we’re still hovering just above the maximum drawdown level.
There’s still some healing to go before the all clear is sounded. At times like this when there is a distinct breakdown of a long standing trend it’s important to maintain discipline and stick to the formula that got us here. We’ve preserved our financial capital by moving to safety positions but maybe more important is the preservation of emotional capital. Not riding every market roller coaster allows investors to make better decisions going forward. Hopefully markets will choose a direction soon but in the meantime I’m very calm and comfortable being in safety positions for now.
And remember nobody is ever going to know when the actual market top is until long after the fact. Nobody knew the last time around that Oct. 9, 2007 was the top until many years later. Unfortunately calling the tops and bottoms of any market is impossible.
So moving to safety positions every time there is market turmoil does mean that once every decade or so we will really be thankful we did. We won’t know when and we may not appreciate it when we’re in the heart of it, but looking backwards after the dust settles we may be rewarded for maintaining discipline.
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