We’re starting to see an interesting shift in the market, and in the short-term things are looking “sub-optimal” (as a Doctor friend would say). Our Long-Term trend indicator has been weakening and is now giving us a negative reading. It tried to go positive this week on Wednesday, but failed on Thursday and looks like its trendline is now struggling and turning down.
Our Mid-Term cycle is having similar struggles this week. It came inches from going positive, but we’re glad it didn’t because Thursday was ugly. In addition to our signals, there are seasonality themes at work: September has the lowest probability of a positive market return of any month of the year.
As of Thursday night, our Shadowridge Dashboard showed Positive to Negative sectors as 7 to 4, which has been holding fairly steady as sector strength seems to be rotating. Last month we said “if the Long-Term trend can stay positive, we’ll likely lean a bit more into equity holdings.” Well, it hasn’t, so we’ve done more selling than buying recently, given all we mentioned above.
There are several other factors that could cause problems: war heating up in the middle east, inflation issues, the Federal Reserve slowing their bond purchases or “tapering”, or even further lockdowns or restrictions relating to COVID. We never really know what it is going to be, only that the data is suggesting to us that something isn’t right.
Friday Update: Of course, all that being said, both the Long-Term Trend and our Mid-Term cycle have shifted positive today. Apparently the market liked what the Fed had to say this morning, even though the “positive” headlines today are suggesting the very thing that we expect to cause problems in the future.
I know, I know, this all sounds ominous. But to us, this suggests opportunities to possibly finish the year really strong. If we can get a pullback into September or October that is in the range of 8-10% (or more), then most of our strategies would sit on the sidelines and likely get a good entry to take advantage of the situation. And it wouldn’t be the first time where we made our year in the last few weeks of the calendar.
This month’s chart shows the NYSE High-Low Index. This can be a bit complicated, so bear with me. The blue line is the S&P500. The overlay is the NYSE High-Low Index, which is a calulation of the ratio of new 52 week highs vs 52 week lows. As the High-Low Index falls, that means more and more stocks are hitting new 52 week lows. That is not a positive metric for the health of the overall stock market. Eventually, when the High-Low Index is falling, the S&P500 tends to follow it. Look at the “COVID Crash” last March, for example. Interestingly, this metric tends to suggest bottoms in the market, especially when it crosses below the 50% line (in green/red). The key is to not wait until it crosses this line to pay attention. By then, it’s too late. Now take a look at the recent behavior of these lines. In July, another bottom was suggested, and indeed, a short dip occurred. But the market quickly recovered and continued pulling higher, while the High-Low Index continues downward. What this tells us is that, sooner or later, something has got to give. And as this indicator approaches that 50% mark, “sooner” seems to be winning over “later.”
Bonds – the Aggregate Bond Index? Yep, it is still negative for the year. As of this writing, the Aggregate Bond Index AGG is at -1.00%. It just hasn’t been a good year for traditional bond investors. High Yield bonds remain strong, being up around 2.90% through August 26th of 2021 (FastTrack Data), but there can be a lot of risk in that asset for minimal reward.
The overall balance of risk to reward, to us, has been questionable for much of 2021. As long as this environment persists, we plan to keep portfolio risk as managed and moderated as we possibly can, while looking for opportunities to end the year strong. Quite frankly, this means we don’t obsess over what the S&P500 does. This can be a poor metric for comparison since we spend a fair amount of time out of the market. Because, as a wise investor once said, a great way to make money is to not lose it in the first place.
Don’t forget to catch our monthly webinar version of this newsletter, where I dive deeper into what I mention in the newsletter commentary. For me, nothing tells the story as much as visuals, so that is how I prefer to dig into what we’re doing with investment decisions. After me, Will and Laura will be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, September 9th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you 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.