Today we will be looking at just a couple of charts and the topic of the day, of course, is how low can it go? The market really has gotten a bit of a correction that I must pat myself on the back and say that I did a fairly good job of warning people. Ahead of time, if you saw my video from a couple of weeks ago, I was warning of various specific market volatility and more extreme than has it been for a while. And it turns out I was correct the barometer that anybody that follows my blog at valuetrend.ca predicted early September, that there would be volatility. So that’s another point that I gave people who both watched this video and read my blog.
It’s not like we weren’t prepared for the volatility and Valuetrend, the company that I run was very set up for this probability. We gave it a probability nothing’s absolutely for sure. But we felt that the market was probably going to correct to some extent, we thought between five and 10% so far, it’s a little bit over five as I speak to you today on the 6th of October. We prepared our portfolio by raising cash. We raised about 17% at the time. We focused on lower volatility and more specifically inflation orientated stocks. That’s worked out very well for us. We were after fees up about 1% in September and the markets were down anywhere between 3.7, I think it was for the TSX to, you know well over 5% for the NASDAQ and somewhere around 5% for the S&P.
So, we outperformed quite substantially as we did over the past three months because we had a similar stance, and a lot of this volatility really began in August. And we’ll be looking at that in a minute. So again, we’re going to address well, okay, Keith, you got it right with the market facing the high probability of a pullback. So how low could it go? My original suggestion was somewhere in the five to 10% area. And the reason for that suggestion is because that is a standard type of bull market pullback, but I want to present a couple of factors that doesn’t necessarily change the picture for the S&P to a more bearish situation, but it’s something we have to keep in mind because there is a probability increasing that the market could go further than that 10%. I’m not making a prediction here.
I am just saying that there are a couple of indicators that I’m going to show you today that might suggest there might be a little bit more downside. However, there’s some pretty strong support coming in soon, and I’ll show you that on the charts. I think part of the issue is, of course, that it’s October and there’s also the debt ceiling toxin and things are a little different. Now. I’m not going to get too much into American politics because I’m not an expert, but I did attend a conference just yesterday, which was on October 5th, with some experts AGC analytics. They’re one of the companies that we subscribed to research from and are political analysts in so far as how it will affect the stock markets and basically, their prognosis is that there really is a difference in the debt ceiling talks this time because basically, you know, I’m going to summarize in a very simplistic way, there are no talks. In the past, at the last minute, President Biden was at the head of the negotiating for the Democrats. And of course, it was a Republican government with Trump and McConnell, who is still at the head of negotiation got together with Biden and they cracked out a deal at the 11th hour. This particular instance is not quite so clear cut, and that’s why the market’s fairly worried because again, I’m reiterating what I heard at the conference yesterday. I’m not a political expert, but as I understand it, McConnell is digging his heels in. And the reasoning for that, as I understand it is there is a genuine fear by the Republicans, that there are more so-called progressives/socialists, whatever term you like to use in the democratic party that were not so much present as in such a great force before apparently something like 70% of the current Senate is, is more kind of extreme, left-leaning rather than mid the middle left.
And so, with that in mind, there are some sort of more socialistic policies that are being bantered about by the Democrats right now, such as free school for everybody and all that kind of thing. And this is not part of the COVID spending that the Republicans have been agreeing to. So that is why, as I understand it from the talks I heard yesterday, that is one of the reasons anyway, why McConnell is digging in. So, there may be a leverage off the current bill to reach some of the other objectives that the more extreme left-wing part of the democratic party wants to achieve, and the Republicans don’t want that to happen. So, we must keep that in mind because that could cause an awful lot of turmoil and the charts are showing this. And that’s it for my political commentary for today.
Let’s look at the daily chart of the S&P 500. This is a line chart. It’s not a candlestick chart, and it’s really showing us since the crash of 2020, the COVID crash. The market has been fairly tight. I’ve talked about this several times before where the volatility was tight, but the drawdowns were there, and they were short-lived and sharp. When they happened nevertheless the travel line was being followed. You can see volatility got very low since May. And I talked about that extensively because there just weren’t any corrections much more than 3% or so since May. And as you can see, a normal bull market does have a 5% to 10% corrections. Well, we didn’t get any since May. It was a long time coming, I guess you could say.
And here we go. Now, what’s changed. Here is the short-term trend line, not the long-term trend line on the S& P 500 has been broken. And you’ll notice that this particular correction, which really began in August, as I mentioned before, is not one of these short blippy ones. It’s been a little bit more prolonged. So, that is something that we should be paying attention to. And now I want to look at the weekly chart and there are some factors that I think we really don’t have to look at now. Let’s look at the big picture here. So, this is a weekly chart candle. And what you will notice is that there was some support around 41 to 4,200 in here, and that could be a target that happens to land somewhere near the 200-day 40-week simple moving average is I think the 200 days, as it says in the chart, it was 4175.
And this is as of the minute I printed this chart up about an hour ago. The 4175 and the S&P is around 4,300. So, we could see 100, 125 somewhere around that to bring us down to that 41 to 4,200 support level. So long as that is held, I would say that the market is pretty healthy. It’s been a correction that’s been needed, whether it’s been longer than has been seen correction over the past year, it’s still pretty healthy, but there are some features that I want you to see. And this is where I’m a little bit concerned. Now I’m not sounding the alarm for a giant bear market. What I am saying is that there may be factors that weren’t there before that could draw this into a longer correction. I want you to go back to 2018, and as everybody remembers, there was an early correction, the very first part of 2018, after a period of low volatility, very similar to what we’ve had recently, there was an early correction, but then the market went on to make a higher high by around October.
Now, funny enough, October was the beginning of a substantial correction, which ended up really washing out through December of 2018. And many of you will remember that because it was high double digits. It was, I think, very close to 20%. It might’ve been 17%. Sorry. I don’t have the figure in front of me right now, but it was a reasonably good correction. So, what you’ll see here is that the MacD indicator gave us a signal by diverging. You see there’s a high and there’s a higher high MacD made a lower high. This is called divergence, and we’re seeing that again. So that divergence doesn’t always but can lead to a correction. So, we’re seeing that right now, we’re seeing the MacD indicator, it made a high back in May and the S&P 500 went on to make a higher high.
In fact, considerably higher. It went from around 4,200 to around 4,500. And instead, the MacD fell substantially. So, what I’m going to suggest is that’s a factor that did lead into a let’s call it 17 or so percent correction back at the end of 2018. And I’m wondering if that’s something that could happen again, I’m not predicting because you can’t predict, but I think it’s something we got to keep our eyes on. And I think the first clue will be if the S&P breaks its support around 4,100. And if it breaks the 200-day moving average, we are probably in for a more substantial correction. That will be determined, and I think a lot of the bantering and fighting that’s going on in the United States right now over the debt ceiling will add to that possibility notice. I didn’t say probability, but it will add to that possibility.
So, that’s my immediate target, 41 to 4,200 with the caveat that if the 200-day moving average, the 40-week moving average is broken they could get much worse. Let’s keep an eye on how the talks go in the United States what we are doing from a strategy point of view. We have been legging in, so we held 17% cash and a whole bunch of inflation stocks. Like I mentioned, at the beginning of the show today through August and September, and it paid off, as I said, we had a positive return in September. We have formulated a plan that we will step in, in three legs. Now we do not know what’s going to happen. We can only look at the evidence in front of us that there is a good level of support coming up, but there are other factors like the MacD.
So given that we did one leg in, because we got our 5% correction, which was the lowest amount of correction we were looking for, we were looking for five to 10%. So, we just legged in our first leg the other day. Okay? That’s one-third of our cash. We have approximately 11 or so percent cash, maybe 12% in our equity platform right now. We will be doing another leg one-third of that cash right around the 18th of this month. Somewhere around there might be the 20th might be the 15th, I don’t know. But that is when kind of this whole debt ceiling thing comes to a head and we’re going to know sooner or later, how that turns out. It could provide an interesting opportunity to leg in again. We shall see we’ll make that judgment as we call it, but we are still holding two-thirds of our cash.
And then we will use whether we do the next installment around the 18th or not, we will see. But whether we do or not, we will only spend the next third. And then the final installment, if you want to call it that, will be made in the traditional seasonal period, which is the end of October or the first week or so of November. We are trying to follow a three-stage leg into the market. It’s as Howard Mark says, ‘you can’t predict, but you can prepare’. And I hope this video has helped you prepare. Now, I want to just suggest to investors who are used to bull markets and are used to buying the dips and all that sort of thing, that if you’re not using a service that has a more quantitative analytical approach that is not buying whole, and is not just relying on a bull market, then you might want to take a serious look at ValueTrend because if I’m correct about what is happening on the markets right now, we are very nimble.
We will step back out again if things start to break down and we know how to do it. We, as evidence shows in 30 years of this business, we tend to do very well in volatile markets. We can give you the performance figures. If you’re interested in our long-term numbers, I’m very proud of what we did in the 2008 crash, for example. So, give us a call or shoot us an email we’re at [email protected]. That email will come directly to me. And we can talk to you about your portfolio management. We’re happy to do that. And this kind of environment is the environment that ValueTrend thrives in. We trade. We don’t buy and hold. I hope that helps. And I hope that you too have a plan to deal with the current uncertainty. Thanks for watching.
