The picture accompanying this post is of Waimea Canyon on the island of Kauai where we are visiting until Saturday night. It is good perspective on the big picture; it's a big canyon. As I write this at mid-trading-day on Thursday, the S&P 500 is again below its 200 day moving average. A little over a week ago I posted that I thought the index was rolling over and I built a chart that I said was very similar to one I used in December 2007 to say that I thought a bear market had started. Here is the chart updated to this morning;

There are a confluence of factors at work here including the cycle simply being long in the tooth, the FOMC has raised rates quite a few times with more to come and the bond market might be pushing back on that, valuations have been stretched for a while (valuation doesn't really offer any predictable timing but is a negative factor), the market is confronting headlines of a political nature that it hasn't to handle very often if ever, Stephanie Pomboy's Twitter feed cites all sorts of economic worries and some of them could be finally coming into play and I am sure there are others.

I obviously don't know what will happen but have been ready to start defensive action if warranted, when warranted which is more important than correctly guessing what the market will do. As a reminder, I initiate defensive action toward the end of the second day of an SPX breach of its 200 DMA. So if it closes below today and then tomorrow looks like it will close below the 200 DMA again I will execute a defensive trade.

I would note that a "defensive trade" does not mean turning the portfolio inside out. The nature of bear markets is that the rollover slowly giving you plenty of time to get out. If a bear market started January 26, here we are three months later not even down 10% from the high. The immediate decline in the first few days of February did take it down 10% very quickly which I described as a fast crash and not a bear market (yet?).

There are several reasons not to turn the portfolio inside out (selling everything or almost everything) as a first step including that despite what it looks like, there could be no bear market starting now. No matter what we think or what things look like, we can always be wrong.

As you read this, hopefully you get a sense of the extent to which this is all about investment process with no emotion. Bear markets come along every so often, if this is one of them then I will take action for clients to try to avoid the full brunt of this or any large decline. You can't go wrong staying disciplined.