The month of October can often be a challenge. At some point in this “spooky” month, major seasonal bottoms tend to happen. October also signals the end of the “Sell in May…” part of the year. Historically, mid-October to late-April is the strong half of the year for most stock market indexes. But that’s not to say there can’t be headwinds.
Now that we are nearly three months into a drawdown, many investors are wondering if this is a continuation of the “bear” market that started in December of 2021. From a technical standpoint, that is entirely possible. None of the US indexes have recovered that high watermark set almost two years ago. But I also consider that when all you hear is “how bad things are in the economy,” I know (from a lot of experience) that taking contrarian action is usually the most beneficial move.
There is also a continued divergence of results from different parts of the stock market. While 2022 was all about Value over Growth, 2023 has shifted the other way (Growth is outperforming Value). And while the S&P 500 and the NASDAQ 100 are still doing reasonably well this year, the Russell 2000 (Small Cap) is down for the year. Even the Aggregate Bond index has continued to produce negative results so far this year.
What does this mean? Traditional diversification is doing investors no favors in this environment. And I don’t think that is about to change any time soon. We’ve held up well by focusing on what is working and excluding what is not. We believe this approach can continue to give us an edge, no matter what direction the market ultimately decides to go (up or down).
And I’m not forgetting that the Yield Curve is still (yes, still) inverted. But it may not be for much longer. If that is the case, then our trading plan will be reviewed and adjusted. But that is a discussion for another day.
Our Shadowridge Long-Term Trend indicator remains negative and still stretched from the mean. That, at very least, suggests a bounce could be soon. And again, a bounce would follow seasonality, even if it is a week or so later than anticipated.
Our Mid-Term Cycle signal continues to be negative after another short-lived fake-out. This is one of the factors we use to help keep us safe in market declines.
And as of Wednesday night (October 25th, 2023) our Shadowridge Dashboard showed Positive to Negative market sectors as 0 to 11. Energy had been a hold-out, but it has slipped to the negative side. However, this state doesn’t tend to last too long, so once we start seeing sectors turn positive, then we will start looking at being more invested in the US markets.
For this month’s chart, I want to revisit the RRG (Relative Rotation Graph) of the eleven S&P 500 sectors relative to BIL (T-Bill ETF). What we usually see as the group moves from the Red “Lagging” box up into the blue “Improving” box is a continued move into the green “leading” area. A market rally typically follows (or at least a week or so of positive movement). But not this time. Just as they started to peak, the majority of the sectors rolled over and weakened all at once. We found this especially odd since this movement agreed with seasonality. So for now, we have to wait a little longer, but the eventual market rally set-up is still there.
RRG (Relative Rotation Graph) of the eleven S&P 500 Sector ETFs (Source: Optuma)
The majority of the Bond market remains quite ugly. Bonds still aren’t working as the non-correlated asset that should balance out a portfolio. We’ve been opting towards short-term durations (as short-term as we can find) if we must hold bond funds or ETFs rather than Money Market funds. And there have been a handful worth owning.
Bottom Line: While we were aggressively playing defense in August and September, we are now looking to get aggressively on the offense. It’s not setting up as soon as we would have liked, but we still have plenty of money on the sidelines to take advantage of a year-end rally. And in some cases, we’re dipping our toes in at these low levels with the expectation that the market could look good in the next 30-45 days. For now, as the song goes, “the waiting is the hardest part.” But as Warren Buffet has said: “The stock market is a device for transferring money from the impatient to the patient.” So we will be patient.
Stay safe out there!
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.