Welcome to our active management update on the market
Let’s put yesterday’s stock market activity into perspective. I am going to share a short-term daily chart and an intermediate-term weekly chart of the S&P 500 Index. As you read the following, I want you to keep in mind strategic diversification and rules-based portfolio management strategies.
The first chart shows two noteworthy things: (1) The price action since the April 30 high has taken the Index down to a support/resistance level (S) that has been well-established over the past year. (2) The daily basis stochastic RSI indicator at the bottom is now oversold for the second time since the rally began in late December. Together this suggests we should see buying come in near these levels. It does not mean the correction is over, but overnight trading suggests the market recognizes this level as important.
The second chart is a weekly basis chart to illustrate that the angle of ascent (B) the stock market has been on since December is not likely to be sustainable. A much more sustainable and long-lasting angle of ascent (A) is shown in the advance from 2016 to 2018. I have replicated that angle (A1) from the December low to show what that would look like. Before you get terribly concerned, if we were to work into that uptrend angle, the S&P does not have to correct down to it. It can just work sideways for a period of time until it approaches the trend.
Note also that the weekly basis stochastic RSI indicator reached oversold territory five times during that great rally of 2016 to 2018. That works out to about once every 4.5 months. Maybe it is just coincidence, but it has been about 4.5 months since this indicator was last oversold.
The S&P 500 recently rallied over 25% in just over four months. Since April 30, we have corrected 4.55%. This is completely normal and constructive market action, especially because the economic backdrop remains largely unchanged. Yes, tariffs will raise inflation about 0.3% by estimates, and they will have earnings implications, but both of those influences are likely to be most impactful in the first 12 months.
Back to my opening comments. International conflict and economic and political news events are not new to Flexible Plan. We have lived through many. That is why we do what we do. Strategic diversification is not done for convenience sake. It is done with deliberate intent to be an important component of risk management. Actively managed, rules-based strategies are our other component of risk management.