This Week’s Message: Should We React?

Statistics such as the ones below provided by Bespoke Investment Group speak to why long-term investor-types tell you to never to sell into the kind of plunge stocks experienced last week.

Per the following, historically, action like we saw last week has been followed by positive 12-month returns 72% of the time.

So, what now? There’s some good and bad news here, but only time will tell which one plays out. The table below lists each time since 1928 where the S&P 500 closed more than 3.5 standard deviations below its 50-DMA without having done so in the prior month. The bad news is that Thursday’s oversold reading has some bad periods in common with it, namely 1929, 1940, 1987, 2001, and 2008. On a more optimistic note, there are also plenty of periods that occurred near short to long term market bottoms where the S&P 500 rallied as it did in 1949, 1963, 1998, 2011, and most recently early 2016. Overall, in the following year the S&P 500 saw an average rally of 8.8% (median: 12.1%) with positive returns 72% of the time. Relative to the S&P 500’s long-term average one year returns, these figures are pretty much in line.   click chart to enlarge


As compelling as the above is, in our view, it’s not enough to forever sit back and allow your portfolio to ride through any and all of the turbulence the market serves up. In our approach, conditions, as opposed to volatility (whatever the level) guide our hands. If, for example, our macro index (certain technical factors play in as well) currently scored in the -40s or the -50s as it did (per our back tests) during the 2001 and 2008 selloffs respectively, we’d have already moved, or be moving, to a net defensive posture within our portfolios. As for the scores at the very bottoms of the like selloffs since, 2011 and 2016 (periods of volatility to ignore), our back tests revealed scores of +8 and +18 respectively; such results would have us maintaining a net growthy posture: Which turned out to be the appropriate non-response in both instances.

This week’s score is +31, which is near the low of the year, but still a long way from negative.


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