Market Update
We would be remiss if we first did not take a moment to honor the memory of our 41st President, George Herbert Walker Bush, on this very special day of remembrance.
God Bless America !
At RAA, we pride ourselves on providing timely information and education.
This month's newsletter should prove to be a doozy! Class is about to begin...
It has been another crazy month in the financial markets.
Our good friend, Mr. Market, is up to no good again.
Last weekend brought some exuberance back into the market on Monday that was quickly washed away. On Sunday, the message from the G-20 meeting in Buenos Aires was taken as a positive step to a fair resolution of the trade war with China. However, once some further detail of the Trump/Xi meeting surfaced on Monday, the water got clouded again and the rally quickly fizzled. To make things much worse, a couple of key technical indicators sounded an alarm yesterday.
Please refer to the charts above. The first is a daily chart of the S&P 500 over the past year. The major point to highlight on the chart is that the level of the S&P 500 has crossed below it's 200 day moving average (red line) once again. The 200 day moving average is widely followed and provides a level that should and often does act as support (where a decline will slow down or stop like it did in April and May) or resistance (where a rally will stall). In this case, the level of the S&P did not slow or stop; it dropped firmly through the red line for the third time since October. This is thought to be a potential bearish (market will go down) indicator.
Another way moving averages are used is to gain a sense of the health of the market by measuring the slope of the line. The slope of the line can indicate if the direction of the market is likely to continue or reverse course. Generally speaking, when the slope is upward and to the right, it is considered to be supportive to a rising market. You will notice that the line was sloping upward and to the right from February all the way to mid October when the market hit it's recent peak. Since that peak, you will notice that the line has become very flat (circled in black). This indicates a potential change in direction for the S&P. I hope that makes sense so far. Now we know that the S&P 500 is trading under it's 200 day moving average. So, what now? Often times what happens next depends on whether another supporting technical indicator triggers to support and strengthen the warning indicted by the original indicator. Looking at the chart again, you will see a blue (maybe purple) line. That is the 50 day moving average. The first thing I will point out is the slope. The fact that it is sloping down means that the health of the direction of the market may not be good. More important to note is the fact that the 50 day line (blue/purple) looks to be on a crash course to cross the 200 day line (red). That is typically not a good thing. So not good that the two lines crossing has been given a pretty easy to understand nickname...The dreaded "Death Cross". A death cross is a chart pattern indicating the potential for a major selloff. We will be watching the action over the next few weeks to see what happens.
The second chart is the price of the 10 year US Treasury bond. The first thing to mention is that as prices of bonds go up, yields go down. Also, we need to remember that US treasury bonds are seen as a safe haven when uncertainty is in the air. Lastly, as you may have learned in Economics 101, supply and demand determine price.
Interest rates have been in rally mode (prices down, demand down) until that quickly reversed in the past week or so. Suddenly, the price of 10 year treasuries popped (yields down, demand up). Let's go back to what we just learned about the 200 day moving average. If you look at the red line on the chart, you will notice that the price rose above the 200 day moving average...seen as a potential positive for a price rally (yields dropping). The major difference here as opposed to the S&P 500 is that both the red line (200 day) and blue line (50 day) are still sloping down and to the right indicating this may only be a correction and we will continue in the same direction. You will also notice that the 50 day (blue line) is nowhere near the red line (200 day). Therefore, the 2 lines are not likely to cross giving support to the current indicator.
In summary, we are cautious. We see the potential for more downside risk in the stock market in the near term and we are not overly concerned about a continued rally in bonds sending interest rates lower.
OK, one last thing to discuss that happened yesterday that sent the markets into a spiral...
For the first time in a very long time we saw "yield curve inversion". Truthfully, we think this was way overblown. A true inversion of the yield curve is when long term rates are lower than short rates. Historically, economists measure the yield of 2 year treasury notes versus 10 year treasury bonds. Current yields are 2.83% and 2.98% respectively and NOT inverted. What occurred yesterday was a slight inversion between 2 year and 5 year treasury notes. They both ended the trading day at a 2.83% yield. The importance of the inversion of the yield curve is that it typically indicates that we are headed for a recession. It has been a reliable indicator. The inversion did lead to recession shortly after occurring in 1981, 1991 and 2000. However, the inversion that occurred in late 2005 was a bit early. It was over 2 years before the economy slipped into recession following the financial crisis in 2008. Fear of the potential unknown consequences is adding more fuel to the fire and creating more concern about uncertainty.
So here we are now...We quickly went from some level of certainty to another case of the Uncertainty flu. We can't say it enough...Mr. Market does not like uncertainty!
Generally speaking, we still believe strongly that stocks offer the best potential for growth over the long-term. However, we still plan to maintain our more conservative stance and the use of lower volatility investment vehicles. We are more concerned about avoiding the large losses than chasing the big gains. We will not always get it right and there will always be winners and losers. I think Peter Lynch taught us well back in the days at Fidelity. Here are a few of my favorite Peter Lynch quotes:
"You should invest in several stocks because out of every five you pick, one will be very great, one will be really bad, and three will be OK."
“Know what you own, and know why you own it”
"A sure cure for taking a stock for granted is a big drop in the price"
A few last notes on our client portfolios: We are glad that we exited our positions in energy focused investments in mid-October when our Spidey senses were tingling telling us something was up. That turned out to be a good move as we recently saw oil trade down to below $50 from above $70.
We also exited most of our direct exposure to banks. Banks were supposed to be a no-brainer as interest rates were to continue rising. That did not turn out to be the case at all. We saw regional banks like SunTrust and Regions hit 52 week lows yesterday. Lastly, we avoided much of the wash out in the NASDAQ and technology stocks in general.
We continuously follow market research and are always looking for new ideas. We plan to continue to take a global approach with a positive view of emerging markets.
If you have any questions, please call or email us.