It's All About the Slope
Friday, October 19, 2018, 1:36:13 PM
At the time I am writing this, the S&P 500 index is down -5.66% off its 52-week high.
The technology stock heavy Nasdaq Composite index is off -8.33% off its 52-week high.
In the big picture, that’s not much of a decline.
However, it seems the press think it’s the end of the world as we know it. E.g., The Economist magazine cover.
Slope of the Long-Term Trendline
Look at the following 15-year monthly chart.
The top window is the S&P 500 index, along with the long-term trend line (the 10-month simple moving average – the blue line).
The bottom window in the chart is the slope of the least squares regression line, I have circled in red when that slope has turned negative.
Note how you want to be fully invested in stocks when the blue line is sloping upwards, and cautious when the slope turns negative. Just following that simple strategy would have saved you from large losses during the 55% decline in the markets from late 2007 to early 2009. As you know, our clients did not suffer huge declines during that period as we started getting cautious in late 2007, using our trend following approach to investing.
Today the slope of the long-term trend line remains up – therefore, we recommend that investors stay invested, or add to their investments while markets are lower.