Yesterday’s sharp slide in US equities has refocused minds on a hardy perennial: the market can and does go down. Obvious, of course, but easy to overlook when prices are rising virtually non-stop, as they have been for much of the past six months—until now.
What would constitute a possible early warning of deeper trouble ahead? There’s no magic number, but if the market slides further, and slips below a -5% drawdown, that would catch my attention. Another way to minimize noise is to focus on weekly charts. As the next chart highlights, the trend remains firmly positive from this perspective, based on 10- and 40-week averages.
Another dimension that helps determine how, or if, to change your risk positioning: the investment time frame. For short-term speculators, there’s a relatively strong case for taking money off the table – less so, at least for now, for medium-/long-term investors.
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