Hello Folks
I apologize for this later than typical post, I typically try to post every 14 days or so, and we are past that point. If my subscriber emails are any indication, many are frustrated by the markets, and justifiably so. Lets try to make some sense out of the recent market action. Note that I remain 100% G-Fund.
I will use the SP 500 and NASDAQ indexes for most of my discussion. Lets go back to September 29, where the SP 500 index appeared to have “found a bottom” at the 1880 area, and rallied higher, on above average volume. This is clearly a desired behavior. Then, over the next few days, the markets continued higher, with October 2 action witnessing a solid upward “punch” on above average volume. That behavior is exactly what we need, and my finger moved very close to the “Leave the G-Fund” trigger guard. Due to the fact that we are indeed in a mature, 6-year uptrend, and arguably “due” for a bear market correction, and other factors, I am not ready to be quick on the trigger, and instead want to continue to assess things. So I was disappointed that the market action in the subsequent days was not as healthy, and thankful that I elected to opt for a safer approach, remaining in G-Fund. Volumes immediately dried up (got lower) and the indexes seemed to lose their energy, with the SP 500 hitting resistance at the 2020 area. The SP 500 is below its 200-day Moving Average, where it has been since August, the 200-day Moving Average being a key trend line watched by many professional money managers (above it is good, below it is bad). The NASDAQ index is below both the 50-day and the 200-day Moving Average.
Before we proceed further, lets look at some charts:
Furthermore, in addition to the lackluster action since October-2, (designated by the reputable newsletter Investors Business Daily as a “follow-thru day”), we started to see some signs of selling or distribution. After an apparent rally, the worst thing to see is selling immediately thereafter. This can indicate many things, namely and perhaps primarily, that investors who had some losses back in August, have waited until the markets rallied and then they decided to get out, thus recovering some damage done a few weeks previously. We have not seen subsequent high volume, “up days” since Oct-2, which are needed to solidify and validate the recent rally attempt (now-subsided). We have had three Distribution days since Oct-2. It should be noted that five distribution days within 20 trading days (until Nov-3 for our scenario) is typically enough to kill any rally attempt and re-send the market into a downward vector. So again, we have had three, if we have five prior to Nov-3, that is clearly a negative signal.
The above is the “chart action” which is 99% of what I use for my investing and trading decisions, as the “market knows all” and trying to crystal-ball things is often a fruitless endeavor. Some may ask what is causing all of this ? I am entering speculation, aka take-a-guess mode (which is what the talk show hosts on CNBC and Bloomberg do themselves, and nothing more), but will propose that the following are causal factors:
- China’s Slowing Economy
- Indecision or Perception of indecision by the FOMC to raise rates
- Recent corporate Quarterly earnings reports reflecting slowing economy, aka Wal-Mart, NetFlix
- Poor retail sales data, possibly reflecting reduced spending by the consumer
With that said, at the end of the day, all that matters is price, and volume. As much as I dislike it, the information conveyed by those indicators have required that I remain 100% G-Fund. I would be cautious of any reports that the economy is healthy and running on all cylinders. Also, the stock markets are a leading, not lagging indicator, and stock markets will decline well before a recession is declared. Be careful when you hear claims otherwise. Go to other sources and listen to other trusted financial experts, all whom believe, like I do, that the stock market is indeed a leading indicator, such as Charles Schwab, New York NYU Stern Business School, Chicago Booth School of Business and the American Institute for Economic Research
Lets keep an eye on the distribution day count up until Nov-3, and also the general price and volume action in the indexes.
Thank you for the great emails and for being a reader. If you have any friends or colleagues that may benefit from this site, please spread the word. Thank you again everyone and talk to you soon.
– Bill Pritchard
