MorningWord 10/15/14: In the Last 10 Years, We Have Only Had ONE Down Year in the $SPX

by Dan October 15, 2014 9:04 am • Commentary

If the sell off from the recent highs is truly the start of a larger correction, there will be no shortage of “signs of the top”, with the list including, massive divergences between U.S./international equities and then between U.S. large cap and small caps, declining breadth (fewer stocks doing more of the heavy lifting), the extraordinary levels of corporate cash flow used for share buybacks, the popping of speculative tech bubbles in social media, 3d, cloud and net security stocks, Facebook’s $20 billion acquisition of WhatsApp, Alibaba’s largest IPO ever, Apple getting back to its prior highs and then the recent push for large corporate roll-ups to unroll.  Any and all of the above will do.  I obviously have no idea whether the Sept 19th top in the SPX was THE top for months or even years to come, but I can tell you that if you think down 7% from the highs feels crappy and has caused untold amounts of pain in your portfolio, unwinding months of gains, then down 10-15% (which we have not had peak to trough since March/June 2011) is gonna feel downright dismal.

Despite the SPX only being down 7% and the Nasdaq composite down 8.5%, both holding onto gains a tad over 1% on the year, there are no shortages of stocks and sectors that have or are approaching bear market territory (usually defined as down 20% from highs). We charted some offenders on Monday after scrolling hundreds of large cap stocks, and offered a menu across almost every sector: This is What It’s Like to Enter a Bear Market).  Obviously some serious technical damage is being done across large and important sectors in the market.

But here is the point, calling a top, and getting portfolio management right near a potential top are two very different things, with one useless and the other downright essential.

So what to do now if you haven’t done a thing and are worried that the fear of the unknown could keep its grip on the markets and thus volatility?  Then you probably want to move your feet in some way shape or form.  What does that mean?  Make a move in some portion of your positioning, re-adjust an allocation to more defensive, take a portion of some of your big gainers off, bite the bullet and cut the cord on a big loser, set some hard stops on individual names…….you get the point, make a bit of a plan and get in motion.  Rather than doing nothing, do a little of something, because sometimes the first step is the hardest.  The real fear would be that down 7% from the highs turns to down 7% on the year.

Remember that in the last 10 years, we have only had ONE down year for the SPX.  But it’s important to note that in the last 20 years, we did have a sustained bear market from 2000 to 2002, and I can tell you from trading through it, it was downright terrible.  Just as there was no end in sight to the bull market expansion of the 1990s, there apparently was no bottom in sight until some of the biggest bull market leaders of the prior period shed 70, 80, or 90% of their peak value by the start of 2003.

S&P 500 Returns 1994 through 2013:

1994 1.33% 2004 10.74%
1995 37.20% 2005 4.83%
1996 22.68% 2006 15.61%
1997 33.10% 2007 5.48%
1998 28.34% 2008 -36.55%
1999 20.89% 2009 25.94%
2000 -9.03% 2010 14.82%
2001 -11.85% 2011 2.10%
2002 -21.97% 2012 15.89%
2003 28.36% 2013 32.15%

So you want pearls of wisdom?  I would say that all of your favorite stocks that have been marked down in excess of the market losses may have done so for a reason.  Maybe buying the dip which many have become accustomed to is the last thing you should be doing.  Maybe this the time to protect what you have.  I know I know, you want to buy stocks when there is blood in the streets, but perhaps this is just the first trickle of a larger move.  The moves you make today in defense of your portfolio, in defense of your future, will offer you the flexibility to take risk if and when we get the all clear, or things get worse.