Investing is all about risk management. Preventing loss is just as important as realizing gain. There are periods in the market where Return of Capital is the more appropriate approach than Return on Capital. Now is one of those times. Those retirement vehicles (401ks, IRAs, etc.) that have exposure to the US equity markets would be prudent to reduce that exposure at this time. You are an adult. You make your own decisions. You do not make investment decisions based on what you read here. You know the drill.

The last couple weeks have done some structural damage to the market. We identified the need to watch the S&P 500 closely back on October 8th. Those levels broke down and were a sign to look for lower prices. We got lower prices and even broke significant support at 1900 on the S&P (by the way, breaking significant support levels are a hallmark of a directionally shifting market – in this instance, from an up trending market to a down trending market). What did this breakdown mean? Something has changed. Specifically, the likelihood of lower prices ahead has increased. That means risk has increased. We don’t like to lose money if we don’t have to… So when the market tells us something has changed, we listen. You should too.

After a good deal of studying many markets and charts, I’ve identified some levels on three US major markets (Dow, S&P 500, and Russell 2000) that would need to be recaptured in order for any equity exposure to be increased or reestablished. Right now, the risk of loss is too high to consider hanging around to see what happens. If these levels are not recaptured soon, then lower prices are likely. If these levels are not recaptured, the best case scenario is sideways price action for a few weeks. One thing is for sure, the next few weeks have a high likelihood of volatility (large price swings), which is also a hallmark of trend change.

In summary, the current potential for reward it too low compared to the current exposure to downside risk. The body of evidence (including Intermarket behavior, cycles, internal breadth, seasonality) point to a dangerous week ahead. We even noticed that today marks the 27th anniversary of the 1987 stock market crash. Does that mean it will again this week? Absolutely not. But volatility and risk are upon us. Buyers beware. Risk ahead!

Here are our levels as annotated on the charts. Hopefully, we can recapture these levels and evaluate the next move. Be careful, curious investor.