• Newsletter Changes
• Markets Get Crash(ier)
• Actions To Take Next Week
• Sector & Market Analysis
• 401k Plan Manager

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Newsletter Changes

Okay…I Heard You.

Shorter. Simpler. To The Point(ier.)

For almost two decades now I have been writing this weekly newsletter. I am overwhelmed and humbled by the literally millions of you who have read and shared it over these past years.

Back then, I was ONLY writing on the weekends. So, the newsletter became a central repository of my thoughts, convictions, forecasts, and portfolio actions each week as the market evolved.

However, in recent years, I have started writing almost daily (along with my great and talented colleagues of Michael Lebowitz (CFA), Richard Rosso (CFP), Danny Ratliff (CFP), John Coumarianos, and Jesse Colombo,) which has changed the needs for the weekly missive.

We have had a lot of emails in recent months (always the case when market volatility picks up) requesting a shorter, simpler, version of the weekly newsletter. Since I write the newsletter for you anyway, it is important I am delivering the content you want.

In the next few weeks, you will start seeing changes to this weekly missive. The first section will be a strictly technical look at the broader market’s support and resistance levels, and “guesstimates” on where we think the markets go next.

This will also give me more time to write for both RIA and RIAPro on broader economic, fundamental, and technical topics. Don’t worry, you aren’t going to miss anything, it will just be in a different place so make sure you swing by the site often. Also, we are going to produce a lot more video commentary and great interviews like we did this past week with Doug Kass and Daniel LaCalle, with many more to come.

The Sector Analysis and 401k Plan Manager will remain unchanged.

While we are in this rebuilding process – I encourage you to submit ideas, suggestions, comments, and criticisms to me. It’s the only way to ensure YOU get the product YOU want. 

Thank you for your readership, support, and input.

Markets Get Crash(ier)

Over the last three weeks, as interest rates surged above 3%, we explored the question of whether something had “just broken” in the market.

• Did Something Just Break? 10-05-18
• Yes, Something Just Broke 10-12-18
• Market Clings To Support – 10-19-18

As I stated last week:

“This past week has been a decidedly tough struggle for stocks to pick themselves up after last week’s drubbing. While we saw a sharp reflexive bounce earlier this week, that bounce quickly faded as stocks returned to retest support at critically important levels.”

While the market was oversold last week, there was no follow through on bounces which ultimately led to “crash” open on Friday morning.

Now, all this SOUNDS terrible. And, after having THE single longest uninterrupted bull run in the history of the market with record low volatility it FEELS even worse. 

So, before we get into the not so good news, let’s keep this all in perspective for a minute.

For the year:

• The S&P 500 index, not including dividends, is down 0.56%.
• The S&P 500 Total Return index is still positive by 0.98%
• A 60/40 model (60% Vanguard S&P 500 and 40% Vanguard Bond Fund) is down 1.72%

What has been different this year so far, is that bonds, while they have reduced the volatility of the recent decline in the S&P 500 index, have not contributed to portfolio returns this year so far. So, the only place to hide has been cash.

However, if we take a look at the market from 2009 to present, we can gain some better context.

The recent decline is very much like the previous corrections in the market. The red circles denote when both “sell signals” align (a correction of overbought conditions and a triggered sell signal). These corrections have specifically coincided with periods where the market was extremely deviated above the running bullish trend line (gold boxes.)  

Currently, the correction, while painful in the short-term has been nothing more than a correction back to the running bullish trend.

So why worry?

The “difference this time,” is significant:

• The Fed is hiking rates versus either lowering or keeping them at zero.
• The Fed is reducing rather than increasing their balance sheet.
• The current Administration is insisting on a “trade war” which slows global growth.
• The economic cycle is mature rather than recovering.
• Record levels of debt at risk of rising rates versus a re-leveraging cycle with ultra-low rates.
• A mature housing, auto, and consumption cycle versus a recovery.
• Global central bank interventions have begun to taper versus expansion
• Peak earnings growth versus expansion
• Peak valuations versus expanding valuations

I could go on, but since you want “short and to the point,” I will stop there.

Here are some simple observations from Doug Kass (click here for recent interview) which dovetails into the following market analysis.

• The S&P Index and most non U.S. equity markets are broken technically.
• The worldwide fundamental outlook (economies and profits) are worse than are generally expected by the consensus.
• Few still believe a large equity markdown is likely.
• The consequences of a pivot in monetary policy in the U.S. (and elsewhere) is understated and not understood by many.
• There are now legitimate alternatives to stocks available in risk-free Treasuries. Those yields only recently have exceeded the S&P dividend yield.
• Stocks don’t go down in a straight line – it usually looks like a jagged line.
• We are in a new regime of volatility.
• A changing market structure – in which passive money overwhelms active money – remains a significant market risk and disruptive influence.

Weekly View

On a weekly basis, the view doesn’t improve much. With the trendline from the 2016 lows now violated, the tenor of the market has changed from bullish to bearish. While the current selloff technically looks a lot like what we saw in late 2015 when the market fretted over Yellen’s decision to start hiking rates, this time is very different. As noted above, global Central Banks are not coming to the rescue, yet anyway, to inject liquidity into the markets, earnings have likely peaked, and global growth is contracting.

While technically there is a weekly confirmed sell-signal in place, the very oversold condition continues to suggest a short-term rally back to the top of the current trading range is likely.

Action: Sell any rally which gets near the top of the current trading range.

Monthly View

On a monthly basis, the backdrop has also worsened.  RSI has dropped into correction territory along with a confirmed monthly sell signal. As I noted back in both December and September, extensions of the market that move 3-standard deviations above the long-term mean are unsustainable. Currently, a reversion back to the longer-term monthly average would entail a drop currently to 2300. A break below the February lows will likely confirm such a move is in process.

Action: Reduce risk on rallies, as detailed above, and look to add hedges on any breaks of long-term support

Actions To Take Next Week