September 2016 Market Commentary
Until mid-September this year, the market has generally shrugged off (or outright ignored) bad news and kept inching its way higher. But then came the unexpected Fed talk earlier this month. We saw a sudden spike in volatility (as measured by the VIX index1), nearly to the point where counter-measures needed to be taken. However, just as the S&P5002 sank towards that point, it stopped falling and began to climb again.
NYSE Advance-Decline Cumulative Average April to Sept 2016
The chart above illustrates this frustrating phenomenon. The top (black) line represents the Advance-Decline Cumulative Average of the New York Stock Exchange. In other words, the total of all stock prices moving up or down. The bottom (blue) line represents the 55-day moving average. If and when that top line crosses below the bottom line, that’s a signal the prevailing trend may become negative. As you can see, even though we’ve experienced some pretty good short term market swings this past summer, the signal has not been triggered… yet.
Fortunately now that the Bank of Japan announcement as well as the Fed announcements are behind us – and both were relatively positive for the market – we might start to feel “normal” again. At least, in our opinion, a lower volatility environment tends to favor a rising market over a falling one.
But then there’s the November election… which is about as far from “normal” as you can get. And with the main two candidates polling closer and closer, it’s hard to have a clear read on who might win, and thus how the markets will be affected. All we really DO know is that the market doesn’t like uncertainty. For buy and hold investors, the risk reward relationship does not seem very good between now and November, but investors who can adapt, as we do, can find opportunities in any market, including this one.
Strategy Updates:
Our CORE strategies (including 403b) are getting an update starting in October of this year. We will now include our V3 strategy as roughly 20% of the Equity/Stock/”Risk-on” portion of the portfolio. The V3 is a quarterly updated adjustment of index funds (Growth, Balanced or Bonds), depending on the expected environment indicated by our “V3” indicator. This will replace the previously “static” portion of the portfolio and will be increased slightly by lowering the percentage invested in the International markets. We believe this will improve the balance of how the Stock-side of the portfolio is invested. Also, note that the V3 is available as a stand-alone strategy.
Some other adjustments we’ve made include reducing exposure to our Sector Trending strategy. While we still believe there is opportunity in Sector Trending, we have observed that it has been difficult for this strategy to get a foothold this year. Therefore, we have been moving portions out of it and into strategies that are holding up better given the current environment. In taking this proactive approach while the market was still relatively high (before the aforementioned Fed drop), in the majority of cases, we have prevented a reasonable amount of losses in many accounts invested in this strategy.
We will continue to be proactively managing your investments, no matter what happens in the election, the world, or the markets. We hope this commentary has been helpful. If you have concerns, please reach out to us so that we can review your personal situation. We are honored to be your advisers, and appreciate the opportunity to answer your questions.
[1] VIX is a trademarked ticker symbol for the CBOE Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.” The VIX is calculated by the Chicago Board Options Exchange (CBOE).
2 The Standard and Poor’s 500 is an unmanaged, capitalization weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
Opinions expressed herein are solely those of Shadowridge Asset Management, LLC. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All written content is for information purposes only. It is not intended to provide any specific financial advice or provide the basis for any financial decisions. Fee-based investment management services are offered by Shadowridge Asset Management, LLC, a Registered Investment Advisor in the State of Texas. This piece is in no way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services to any residents of any State other than the State of Texas or where otherwise legally permitted. *Past performance does not indicate future returns.