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CAPITAL IDEAS: Mort à la résistance

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By Wednesday, Feb 20, 2019 Trade and Commerce

Dalton — Death to the resistance! That’s what happened to the S&P 500 stock index last week. We have been tracking the rally from the Dec. 24 low to determine its sustainability. Due to improving breadth, we had all but ruled out a re-test of those lows. But we still needed to see the S&P 500 break its 200-day moving average of 2,740 points for us to consider the rally to be on firmer footing. We had been bumping our heads on that resistance line, but with such a positive technical backdrop that we speculated any failure would limit a decline to about a 4-percent drop in prices before breaking resistance. Still the possibility existed of a larger decline, but now those probabilities have dissipated.

But we didn’t even have to suffer that one step back of 4 percent before getting off to the races again. Admittedly a drop of 4 percent is painful but, as we said last week, we didn’t sweat it too much because the stock market corrects 5 percent, on average, three and a half times per year. A pullback of such limited magnitude wouldn’t have changed our constructive views of the market.

It looks as if we’ve got clear sailing to the next line of resistance, the attempted rally high we made in November, 2,813 points on the S&P. That’s not much higher from where we are now, but sans deterioration in U.S.-China trade talks or traction made on European auto tariffs, breaking that level gives us a path to new market highs.

To be sure, as intimated by the mention of tracking breadth (a technique used to gauge the direction of the overall market by comparing the number of advancing stocks to the number of declining), examining index prices in isolation can often be misleading. I loathe the use of recency bias in this business, and in everyday life, for that matter. Recency bias is the tendency to think that what’s been happening recently will keep happening. It’s one of a group of behavioral finance biases that cloud the judgement of investors. It causes people to buy stocks when they go up in price and, conversely, it keeps people from buying stocks when prices go down. The person who first taught me this a quarter century ago referred to it as “forecasting for dummies.” I bring it up because I don’t want you thinking that I think the market will go up just because it has gone up recently. I’d be a dummy to think that.

Using a tool we follow to measure breadth, the rally from the Dec. 24 low was one of only nine other instances since 1940 in which the S&P 500 went from a similarly oversold position to having experienced such a positive breadth expansion. Of those observations, seven started below its 200-day moving average, as did this one. Of those seven instances, the S&P 500 averaged a gain of 35.2 percent one year later from its lows and 55.6 percent two years later. I absolutely do not cite those figures to suggest comparable returns should be expected, but it does argue for a low probability of anything else other than a sustainable advance in stock prices.

According to a survey that was released last week by the American Institute of CPAs, this probably matters to you. The study revealed that running out of money is the number one financial concern for those who have retirement on their minds. The study was taken from Aug. 20 through Sept. 24, prior to the fourth-quarter meltdown, so the CPA clients didn’t suffer from recency bias (i.e., their fears were not artificially heightened due to a recent decline in the market). The other top concerns were maintaining their current lifestyle in retirement, and contending with rising health care costs.

Breaking down the concerns of running out of money or being forced to experience a diminished lifestyle, the genesis of those fears were health care cost (77 percent cited this as a concern; according to the Fidelity Retirement Health Care Cost Estimate, an average retired couple age 65 in 2018 may need approximately $280,000 saved, after tax, to cover health care expenses in retirement), market fluctuations (53 percent), and unexpected costs (50 percent).

The unexpected cost concern is very real. We even test for it in our clients’ financial plans to determine the probability of successful outcomes in recognizing needs, wants and wishes should the investor experience an unforeseen financial shock. And health care we could write a book on. And the market fluctuation concerns—we get it because we live it. So we need to keep you informed about the markets and whether or not you need to take action to protect your portfolio. I have switched from defensive positions taken months ago to something much more growth-oriented. And I’m not feeling nervous at all about it.

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Allen Harris, the author of ‘Build It, Sell It, Profit: Taking Care of Business Today to Get Top Dollar When You Retire,’ is a Certified Value Growth Advisor and Certified Exit Planning Advisor for business owners. He is the owner of Berkshire Money Management in Dalton, managing investments of more than $400 million. His forecasts and opinions are purely his own. None of the information presented here should be construed as individualized investment advice, an endorsement of Berkshire Money Management or a solicitation to become a client of Berkshire Money Management. Direct inquiries to aharris@berkshiremm.com.


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