Falling Stock Prices Not Relevant…Yet

Here is a little context for today’s large drop in stock prices. As you can see in the chart below tracking the Vanguard Total Stock Market Index since late 2012, the upward trend we have been enjoying is still intact, and this week’s drop looks like a mole hill on top of a mountain. A small decline over a few days simply isn’t relevant to patient investors.

2014-09-25 VTI 50-200Source: TD Ameritrade, Vanguard, Morningstar

What makes the recent decline somewhat newsworthy is that the stock market dropped through an indicator level known as the 50-day moving average (literally, the average of the last 50 trading days) — the thin green line on the chart. This indicator is closely watched by market participants, but it doesn’t mean much by itself. The market has taken a breather at or below the 50-day line many times before heading higher.

But now that we’re here, all eyes are on the blue line — the 200-day moving average. A sustained move below the 200-day line can become relevant very quickly.

As always, we are watching closely and will rebalance asset allocations as needed. No doubt the Federal Reserve is watching closely too — it will not surprise me if there is renewed talk of (more) liquidity from the Fed if the markets deteriorate further.