January 2018 Market Commentary

Happy New Year!  And what a year it’s been so far!  Coming off of 2017 where the S&P 500 1  was up just over 20%, and Large Cap Growth was even better, we’re off to a positive start of 2018.  The most prominent question we are getting right now is “how long will it last?”  And while no one knows when exactly a run like this will end, there is no shortage of “experts” out there saying they do.

What we are currently modeling out is two potential outcomes.  The first is where this run-up lasts until March before turning down (similar to what market analyst Tom McClellan is projecting).  The second is where the run continues through the summer and possibly into early fall – going into the seasonally rough 3rd quarter (an extended version of “Sell in May and Go Away” as referenced in the Stock Traders Almanac).

No matter how 2018 plays out, we’ll have our metrics to follow.  One of the nice things about following market data is that we don’t have to specialize in trying to make predictions and hope they are right.  Instead, we can focus on what is actually happening and make decisions based on data, rather than gossip, politics, or pundits.  Technical analysis allows us to have a plan of action, no matter what happens.

A great example of this is the NYSE Advance-Decline line.  We believe it gives us a good feel for what is happening in regards to institutional buyers and sellers of stocks.  When the cumulative line drops below a moving average, that can be an excellent time to get defensive (which we really have not seen happen in the past year).

 

One Year chart of the NYSE Advance-Decline Cumulative Average with 55 Day Moving Average – StockCharts.com

 

Our V3Indicator is suggesting we remain in Growth mode through at least the end of the 1st quarter of 2018.  This could potentially pair with McClellan’s top if the signal says to go more defensive starting in April.  Though, it is far too early to tell.

International Focus – we continue to focus on Japan and China as global points of interest and continue to use them in our core equity (Advance-Protect) models.  This served us well in the fourth quarter of 2017 as well as so far into 2018.

Bonds – may be finally heading into the bear market we’ve been expecting, along with rising interest rates.  Even “bond king” Bill Gross seems to think it is time for this.  Either way, we’ve positioned our Bond “Income” model to short-term and tactical bond funds for the first quarter to lower our potential risk of any down-side that may occur.

As always, we remain focused on doing our best to defend our clients from catastrophic losses in their accounts.  We appreciate your trust and look forward to a prosperous 2018 with you!

 


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 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.