The Independent Market Observer

More Market Volatility in the Forecast?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 22, 2020 4:48:54 PM

and tagged Commentary

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volatilityAs we have seen, markets have continued to decline throughout September. Despite some attempts to rally, we are now well below the peak at the start of the month. How worried should we be?

First, Some Context

As I write this, the S&P 500 Index, a broad market indicator, is down by just over 8 percent. The Nasdaq, dominated by technology stocks, is down by just over 10 percent. These are meaningful declines, but they are certainly not unusual. In fact, a 10 percent decline is so common there is a name for it: a “correction.” So, the Nasdaq is now in a correction, while the S&P 500 is not there yet. This is, so far, a normal decline, well within what normally happens.

Another way to look at the declines is to examine the past history of the markets. One way to do so is to look at recent price history. For the S&P 500, a price level of 3,250 looks like a recent breakpoint, which means where we are right now could be a breakpoint. We could see a bounce, which would be positive, or a drop below that point, which would leave the next support level at around 3,100. For the Nasdaq, we see the same effect at around 10,800, which again suggests either a bounce or the possibility of a further decline, in this case to around 10,000.

The useful thing about this kind of analysis is that it defines levels where we can make a determination about where the market seems to be headed. Short term, if we do not see a bounce, we might see some more downside. But if we do, it should be fairly constrained. This gives us some context to interpret what the market is doing and why.

The Long View

This analysis doesn’t, however, give us guidance around the longer term. Right now, the longer-term trends are still positive for both the S&P 500 and the Nasdaq. The 200-day moving average is a good indicator of the longer-term trend. While an index remains above that level, it still has a tendency to rise. For the S&P 500, that trend line is just over 3,100; for the Nasdaq, that trend line is 9,480. Both indices are not only still in an uptrend but can still decline further and remain in a long-term uptrend. In fact, for the S&P 500, we have seen the index hit the 200-day moving average and bounce twice this summer. This uptrend has proven to be quite durable, despite the volatility.

Even if the markets do break through that trend line, though, that doesn’t mean a long-term bear market. We saw that earlier this year, when markets plunged in February and March, only to bounce back. Drops below the trend line are often short before markets then go on to recover.

Keep an Eye on the Forecast

If you are a long-term investor, of course, you really don’t need any of this. Market analysis is more like weather forecasting than anything else. If you plan to stay the course, those forecasts can be useful—but will not change your life. Imagine buying a house in Massachusetts, for example, where I live. Sometimes we’ll get a particularly nasty winter, with scary storms. Does that mean I move? No, just that I have to prepare for the storm and wait it out. The forecasts are useful, in that they let me prepare, but they are certainly not something that will make me sell my house and move somewhere else.

Right now, the weather is a bit stormy, but it is still within a normal market season. So far, on the market front, things still look normal. If it does get stormier, then we will keep an eye on the forecasts and prepare. But even then, we won’t panic. Keep calm and carry on.

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