After an unexpectedly and uncharacteristically ugly December, January 2019 so far has been a nice break from the down-trend. The government shutdown, while a big source of debate politically, was a non-issue relating to movement in the stock market. It could be argued that the market approved of the government being closed, as the majority of market days during that time were positive. Go figure.
We believe there are actually some underlying positives that could keep pushing this market higher, at least in the short term. For one, many other money managers we stay in touch with have been avoiding this rebound. We’ve also seen signs that there hasn’t been much investor trust in this rebound. Being contrarian, we’re considering this as a potential positive for the overall market.
Other positives we see include more New Highs vs New Lows nearly every day on the NYSE as well as an improving cumulative average of all the stocks on the NYSE (source: stockcharts.com). Beyond this data, on Wednesday the Federal Reserve announced they would hold rates where they are and be “patient in assessing future rate hikes” – another potentially positive sign for the stock market (source: cnbc.com)
This month’s chart is a monthly look at the S&P 5001 over the past 5 years with a 12-month moving average. The theory around this is that when the last day of the month closes above the moving average (blue) line, then the expected bias is positive for the next month. As you can see, the index closed just above the line on November 30th, 2018 – suggesting that December would be positive. Unfortunately, it didn’t work out that way. But this is one of the reasons we weren’t positioned defensively going into December. And it likely would have worked out for us, if the Fed hadn’t hinted mid-month at remaining aggressive with interest rate increases (source: cnbc.com).
Five Year chart of the S&P 500 w/12 Month Moving Average – StockCharts.com2
Our V33 Indicator changed to “Defense” mode for the first quarter of 2019. Even with the bounce back after December 24th, it wasn’t enough to switch our model to “Growth” mode. However, we saw enough momentum going into the New Year that a few of our core equity strategies have stayed invested, and benefited from the bounce. Our position here is that at the first sign of trouble, we’ll be lowering risk (fewer stocks, more bonds).
Bonds – The Aggregate Bond index (AGG) is just barely above break-even so far this year (ishares.com). Much of their direction in 2019, we expect, will be dictated by what the Federal Reserve decides to do with interest rates and their balance sheet adjustments. It could be good, or it could speed us into recession.
No matter what the market brings, our trading plan is to be faster into protection mode (in other words, quicker to lower stock market exposure) because what we see is the potential for 2019 being a “musical chairs” market. There may still be some upside, but at some point the music could suddenly stop. We want to be first one sitting when there is a rush for the last chair – positioning us well for the next round.
Thank you for your continued trust in us. All the best to you and yours in this new year!
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.