Well, that got ugly fast. The S&P 5001 is now in range to achieve the largest loss in January going back to 1928 (reuters.com). The previous January with the largest loss was in 2009 when the market started its last leg down of the 2008 recession period.
Luckily for us, our data said to start playing it safe just as the downturn began to accelerate. So our investment models have had reduced market exposure to help protect our clients while the market has been a bit crazy.
For some reason, the market seems to suddenly care about the Federal Reserve raising interest rates. We’ve been saying for months that this was going to happen. At this point, the Fed might be behind the curve a bit. We believe they may have let inflation accelerate much more than they intended – all while calling it “transitory.” While many of us in the investment world saw through that comment and prepared for what it could do to the stock market.
Our Shadowridge Mid-Term Cycle signal went negative on January 18th. Since that time, the market has accelerated to new lows. Up until that point, it looked like the sell-off was going to be just like the last several we had in 2021, with a quick rebound and things getting back to normal. But no, this time the correction was real. And that’s what we always find interesting about using data to drive decisions – we never know which sell signal will be just a blip on the screen, and which one will turn into a fully-fledged correction. So we continue to act on each signal as if we expect the latter.
As of Thursday night (January 27th, 2022), our Shadowridge Dashboard showed Positive to Negative sectors as 1 to 10. The only positive sector has been Energy. Of the major market indexes we follow, the only positive note has been Latin America. We happen to hold a small allocation of Latin America in our most aggressive model, even as all the other holdings were sold off as the correction progressed.
What we are now looking at in the market are extreme oversold conditions. At this point, we’re not sure if we are going to see a small bounce upwards before the market continues down, or if this sell-off has been enough to create large-scale buying to push the markets back to new highs. As always, we’ll follow the data and let it determine the course of action.
But some interesting opportunities could arise in the near future.
For this month’s chart, let’s revisit the NYSE New Highs-New Lows chart we looked at last month. Again, the Green/Pink line is the daily sum of stocks going up minus the sum of stocks going down. When the line is green, it’s positive. And when the line is pink, it’s negative. We also have two moving averages (lines in purple and red). What we watch for is first, the Green/Pink line turning pink. Then we watch if the pink line falls below the red and purple moving average lines. When that happens, something might be wrong in the broad markets.
When we left off last month, the NYSE line had turned back to green and had just moved back above both moving averages. Everything seemed like it was going to be ok until about mid-month when it turned back to pink and crossed back below both moving averages with quite a bit of force. At this point, so much of the market looks oversold that a bounce looks likely. But it will take a broad market push back upwards to get this line back to its green color.
Bonds – the Aggregate Bond Index AGG is already -2.06% YTD in 2022. The 7-10yr Treasury bond index is -2.34% this year. And that’s not a great start to the year for the asset class which is often used to reduce portfolio risk. (FastTrack Data). Therefore we are not leaning heavily into traditional bonds for risk reduction at this time; rather, we are looking at Floating Rate Bonds and some Mortgage-backed bonds (at least until they stop holding up).
Bottom line – we are largely in a mode of asset protection as this market downturn doesn’t seem to want to end just yet. We’re hopeful of a swift rebound at some point, but it may take a little while to get there. As always, we’ll remain vigilant and ready to dive back into the market when the time looks right.
Stay safe out there!!
Don’t forget to catch our monthly webinar, where I dive deeper into what I have mentioned in this newsletter commentary. For me, nothing tells the story as much as visuals, so I really enjoy the webinar for digging into what we’re doing with investment decisions. Will, Phil, and Laura will also be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Friday, February 11th 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.