February Market Update


February 2018


After one of the most explosive up months in memory the market erased the gains for the last three months in a couple of sessions.  The first time the S&P 500 touched these prices was back in October 2017.  The two most common questions we've been fielding are "what happened?" and "when will the decline end?"

What happened?

We've known the market was extended for some time now.  Price accelerated in the month of January to become even more extended and vulnerable to a steep correction.  For more detail on this click the link below.  Normally it takes an event of some kind to set off a correction.  The most plausible explanation is that bond yields have been on the rise and have broken to levels we last saw in January 2014.  Ironically, strong employment numbers and a healthy economy appears to be the reason the stock market went into a corrective mode.  The markets reflect competition for investor capital.  Each move higher in bond yields pulls more investors out of the stock market and into money markets and other fixed income investments.  When coupled with changing investor appetites for an already extended market it is usually only a matter of time until a correction is underway.

When will the decline end?

It isn't possible to answer this with any certainty, but we have some guideposts that we can observe.  First, the economy has been strengthening in the past year.  There haven't been any negative shocks to the economy.  So, we don't anticipate a recession will be upon us in the near future.  Operating within that context, we can observe that the price trend in the link below off of the 2016 lows is still intact.  It is plausible that prices will stop falling in the vicinity of that trend, which is roughly another 2% lower from today's close.  If the trend is broken the next most probable scenario is that the S&P 500 establishes a new, less steep up trend.  If that scenario were to unfold prices would drop further and then price would move sideways for some period of time before beginning a new uptrend.  It is possible that we could see an even steeper correction back to the main bull market trend which would be a significant drop from here, but I don't see that as a probable scenario.

I see this correction as a much-needed event and one that will allow the bull market to refresh and continue for longer.  The market simply could not sustain the speed it was moving in January and I felt strongly that any further move higher would only make the pain of the inevitable correction that much greater.  Now that we are seeing prices correct, it provides us with an opportunity to re-position accounts for the next leg higher.


This link provides additional commentary as well as a chart that highlights some of the concepts we’ve discussed.https://www.tradingview.com/chart/SPX/cQf3sqn0-Correction-February-2018/