Historically, the months of September and October don’t have good odds of positive returns in the stock market (Stock Trader’s Almanac). And while September this year was slightly positive, October came in and gave back all the gains of the S&P 500 for the year so far (Fast Track data). However, the drawdown experienced in October is still smaller (ever-so-slightly) than what we experienced in February this year. Both were approximately 10% from peak to the next bottom. So, while the October volatility has felt dramatic, primarily due to its duration, we’ve seen worse – even earlier this year.
As we stated in our mid-month “Recent Market Volatility” update, we’d been moving to be more defensive as early as the beginning of September. So, while we still felt some of this recent downturn in our accounts, being defensive slowed this down.
Earnings season still appears to be positive, just not as positive as the market seems to want. And ironically, the technology stocks that had been the primary reason for market growth this year (until it gave it all back in October) are what appear to be driving this downturn. The next announcement that we’re watching for is AAPL, which will announce earnings on November 1. According to Tom McClellan, Apple’s earnings tend to historically trigger a move upwards. And since Apple stock is such a large holding in many of the major indexes, that could bode well for the overall market going into November.
The market is now, in the short-term, overly pessimistic. Metrics like the Put/Call Ratio, the VIX (Volatility Index), Chaikin Money Flow, and the McClellan Summation Index are all showing negative readings but could be overdone at this point. We believe there is room for them to bounce back from here. We’ll see!
This month’s chart comes from our friend Rob Bernstein of RGB Capital. His sentiment is similar to ours, in that he also sees the market being “oversold” in its current state. His chart shows the percentage of stocks in the S&P 5001 that are above or below their 50-day moving average.
Three Year chart of the % of S&P 500 stocks above/below their 50-day moving Average – RGBCaptialgroup.com2,4
Our V33 Indicator remains in “Growth” mode for the fourth quarter of 2018. Even with the recent volatility, we haven’t seen any strong reason to doubt the overall market will be higher by the end of the year.
Bonds – The Aggregate Bond index (AGG) remains negative for the year, currently sitting right around -2.03% (ishares.com). While the overall bond market has been rough this year, Bank Loans, short-term corporate bonds, and money market funds continue to be bright spots. Utilizing these types of instruments, our core bond model has remained stronger than the bond index year to date, a bright spot for our more conservative investors.
Our Municipal Bond strategy is changing to a defensive position as of today’s close. Our signals to be in that market usually last several months to years, and we’d been in that space continually since February of 2017. It looks like it is time to take a break and be defensive.
As always, we thank you for your patronage and encourage you to contact us with any questions or concerns.
We hope everyone has a fun and safe Halloween!!
1 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.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
3 V3 is a proprietary indicator developed by Shadowridge Asset Management, LLC. Its objective is to take several market sentiment factors and project how to view US stock market investment in the following quarter: for Safety, for Balance, or for Growth.
4 RGB Perspectives is provided for general information purposes only. It does not constitute an offer to sell or a solicitation to buy a security, and is not an offer to provide any specific investment advice. Securities held in the RGB models are subject to change without notice. Past performance is not a guarantee of future performance. It is not possible to invest directly in an index. Individual account results will vary from RGB models due to timing of investment, amount of investment and actual securities used. Advisory fees are deducted within the first month of the quarter for the prior quarter. Most data and charts are provided by www.fasttrack.net or TC2000 (www.worden.com).