You remember the great scene in Rocky (the original film) when the young boxer Rocky Balboa, beaten and battered to a pulp through thirteen-and-a-half rounds by the reigning champ Apollo Creed, gets up after being knocked out and surprises everyone at the end of the 14th round? It is one of our favorite scenes in all of filmdom!
We were reminded of that scene when recently listening to a great podcast.* And like Rocky's bounce back, the U.S. equity market has bounced nicely from its recent knockout. The S&P 500 Index's ride down from this year's high on January 26 to the intraday low on February 9 represents a 12% peak-to-trough decline and the first real "correction" (defined as a greater than a 10% peak-to-trough decline) in three years. This is extraordinary because going back 100 years or so, the S&P 500 Index has about a 50% chance of at least a 10% correction in any single year according to Bloomberg Analytics.
(Excuse our upcoming interlude here into the dark art of "technical analysis," an investment approach focused on analyzing the historical price action of a security or index with complete disregard to fundamental factors such as valuation and earnings growth. This approach is not something we spend a lot of time thinking about or applying in our investment process, but we do, at times, pay passing attention to key technical price levels just like when we sometimes read the gossip rags when standing in line at the grocery store …)
In the chart below you will notice a smooth white line cutting across below the green price index bar chart (showing the opening price, closing price and the intraday range) for the S&P 500 Index. This white line is the "200 day moving average" or the average of the index's closing prices for the last 200 days. In technical investment circles, this is considered a significant level and can serve as a short-term price "floor" or "resistance" for an upwardly trending security or index.
Sure enough this floor worked on February 9. Going forward, the future path of the index is anyone's guess. We would be just as surprised to see the index "retest" (using technical analysis jargon) the lows of the year as we would if the index went to new highs.
This bout of volatility ended in only a correction. We would expect a bear market (defined as a sustained peak-to-trough decline that is greater than 20%) at some point out in the future. Recall that Rocky got up in the 14th, but he did not win the fight (he tied). However, he did go on in his career to win many more bouts and became the greatest fighter in the world.
*Hat-tip to the great interview with retired Navy SEAL and endurance athlete David Goggins on the Joe Rogan Podcast found here.
Contact Russell Moenich to learn more about this topic.
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