We’re in that part of the cycle where friends from high school are calling me to ask about the market and family members I’ve never spoken to about the markets are now interested. It’s funny what a little volatility can do to peak people’s interests.
Anyway, these calls are coming early and often. Many of you in a similar position to me are probably having the same experience.
Today, I thought I’d just write a quick post about what I’m telling my loved ones when they ask.
First of all, I definitely stress that not having a plan is the first problem. This shouldn’t be the time to try and figure out what to do. This is when stress levels are elevated and when we’re most vulnerable to make irrational decisions. I try to remind them of this, but they don’t care. They never do.
So moving on, the old, “JC, when do I buy stocks?” question keeps coming back. It’s fair. Everyone wants to know.
So here’s the 1 chart I send. It’s the percentage of stocks on the New York Stock Exchange trading above their 200 day moving average:
Why does this matter? Well, if a stock is above its 200 day simple moving average, it’s probably not in a downtrend. I think we can all agree on that. 200 days is a lazy way of defining an uptrend, but it certainly works well for this particular purpose.
Historically, it’s not when the percentage of stocks above their 200 day falls below 15%. The time to own stocks is when we’re already back above it.
This filter helps avoid bottoming fishing. I don’t agree with the “scaling in method”. Just buying every week until it hits zero and then having an average entry point I guess is ok, if you’re into that sort of thing. But it’s not for me.
In fact, I’d rather pay more knowing the trend is up and expanding broadly, than trying to be a hero and bottom fishing a crashing stock market.
To be clear, I think this all depends on your time horizon and risk tolerance, of course. We’ve certainly put out trades from both the long and short side in recent months. There have been massive opportunities with this volatility. But heavy cash positions have been a great strategy as well. Both of these have been valid arguments.
But for this specific post, what I’m telling friends and family right now, I like this chart above. Their time horizons are much longer term and are just trying to put some money to work at the right time. I get it. This chart is 1) easy to understand 2) it helps manage risk 3) it helps put us in the direction of the primary trend, 4) it’s free to track.
Last time we were in this situation was the 4th quarter of 2018. And as ‘end of the world bearish’ as we had been, it was the % of stocks above their 200 day, breaking out of 15%, that got us bullish and buying stocks in early January 2019. I expect to have a similar experience this year.
What are you sending your friends and family?
Share it with me here.