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An 18 Year Breakout?

An 18 Year Breakout?

| November 16, 2017

As a 44-year old man, I'm dealing with male pattern baldness and acne. That doesn't seem fair. It should be one or the other. Acne breakouts in my teens makes sense. Thinning hair and an expanding waistline in my forties is to be expected. Which is it? Am I an old man or am I a teenager?

Like me, the markets are a bit of a contradiction when talking about a bull or a bear. A bull market is the term for a market that is going up in value and a bear is term for a market that is going down. The question I hear once a week from clients and their referrals is: Which is it? Are we in a bull or a bear market? My unsatisfying answer is: it depends on your time horizon. But it's an honest answer. My colleague here at Privada Wealth Management, Jared Coffin, shared a few points that inspired me to unpack the answer below.

Jared showed me this chart with the following insight, "After researching and charting this weekend the thing that never seems to get clarified is what time frame people are referencing. It all depends on the time frame, be it long term, intermediate, short term etc. If you look at yearly SP 500 chart going back to 1930, it appears we are just starting a bullish breakout (See Figure 1). However, if you look at a 30-minute chart it looks like doom and gloom is setting in. Just fascinating that I think so many of these analysts are probably right, yet they are right on different time frames..."

Figure 1 (Source)

Jared, who specializes in technical analysis, went on to point out a trend of "consolidation" and "breakouts." Consolidation is a term for a sideways trend of range-bound prices. A breakout has nothing to do with acne in this case. It's a breakout from the previous trend; in this case a new bull market. You can begin to see a pattern of approximately 18-20 years in consolidation versus an approximate 18-20 breakout bull markets. For clarity, the approximate trends are outlined in straight lines for breakout bull markets and squares for consolidation trends. Keep in mind, the S&P 500 and other such indices are unmanaged, do not incur fees or expense, cannot be invested into directly and individual investor's results will vary. And remember, past performance is no guarantee of future results.

This data should be used to inform your long-term decision-making processes. However, the science of technical analysis must pair with the art of investor psychology. Even if we began a bull market in the late 2000's, volatility can make cowards of us all. In other words, nobody invests in 1930 and then checks their account value in 2017. Typically, market fluctuations and inflammatory news events keep us in an oscillating state of fear and greed. For instance, the bull market that began in 1982 was rocked by Black Monday in 1987, when the Dow Jones Industrial Average declined over 22% in a single day. Would you be convinced that the stock market was trending up? Would you stay the course with the equity allocation on of your portfolio?

Our job as financial planners is to educate you, first and foremost. In this blog and many more to come we hope to introduce you to concepts and terminology that will provide greater clarity. We intend to show the power of combining fundamental and technical analysis to economic and market data. More importantly, our goal is to make these powerful concepts easier to understand. If you'd like more education on our unique approach, click here.