Is The Season For Stock Market Selling Upon Us?

/ Percension Wealth Advisors, LLC/

In The News...

The stock market volatility typically associated with the summer months is picking up. The S&P 500 has fallen more than -2.0% over the past two weeks.

In the grand scheme of things -2% is minimal, yet is still the largest two-week decline since Oct. 2016. This says more about the strength of the rally than it does about current market weakness, but it does beg the question whether more losses are in store before the rally resumes, presuming it does.

What I see: Below is a look at the S&P 500, dating back to the low from Feb. 2016. I turned bullish on the market in the summer of last year. Since then the rising trend has sustained, but has that tide now shifted?

In the long-term I would say no. In the short-term I could see another loss of -2% (or so) before stocks continue their rally. (I say stocks in reference to the S&P because the S&P is the most accurate representation of the total U.S. market.) There are three different price-points where I think stocks could pinball higher, which I have illustrated below. Take a look...

(chart created via stockcharts.com)

These 3 price-points where stocks could rebound are:

  1. Price of 2,400 (purple line). The S&P 500 struggled somewhat to get above this point. Now that it has, it might have trouble falling below it.
  2. Rising trend (blue line). This could provide a second line-of-defense as a point where stocks bounce.
  3. 200-day moving average (purple line). This would be the third, and potentially last, line-of-defense. However this, in my view, would be the strongest possible point that could slingshot stocks out of a rut and onto another rally, due to it being a universally used indicator among investors.

Let's see how stocks respond next week and whether one (or more) of these price areas come into play.

In The Market...

The S&P 500 fell -0.6% this past week. Let's look under the hood...

(price data via Yahoo Finance)

Stocks: I already mentioned that this was the second-straight weekly decline for the S&P 500 (IVV). Digging deeper we notice that momentum worsened again too. Three weeks ago, 76% of S&P 500 stocks were above their 200-day moving average prices. Today, that ratio is just 63%.

Coincidentally, exactly two years ago this coming week we saw the S&P drop -10% in a matter of days. The difference here, I believe, is that the long-term view of the stock market is stronger than it was then. Back in Aug. 2015 the market had plateaued three months prior to that sharp decline, whereas today the S&P set a record high as recently as two weeks ago. Poor seasonality works against stocks right now on a short-term basis, but I would side with the strength of the longer-term view. If anything, I would expect stocks to remain choppy and move sideways for a bit before there is any big move higher or lower.

At the sector level, Utilities were the only big winner. This is a sector I am strongly considering buying. This would likely come from selling our Health Care (XLV) position, which just has not followed through with the gains I anticipated.

Bonds: It was a typical week for bonds, based on how stocks behaved. Treasury bonds rallied when stocks fell, which is typical because investors tend to migrate from riskier assets into safer ones when stocks decline. High-yield bonds channeled the movement of stocks, but to a lesser degree. This makes sense because high-yield bonds tend to be a hybrid between stocks (risky) and treasury bonds or corporate bonds (less risky).

In Our Opinion...

I received quite a bit of feedback on my thoughts last week pertaining to North Korea. To be clear, one thing I do not do is politicize the stock market, for three reasons:

  1. I do not believe that presidents, politics, etc. influence the market anywhere close to the degree that "experts" would lead you to believe, especially in the long-term.
  2. Even if/when they do, it is impossible to measure such impact. In order to do so, you would have to know what motivates the buying and selling decisions of every investor who participates in the market on a given day. That is impossible.
  3. I am simply uninterested in debating politics relative to the market.

I appreciate that most of you have strong opinions when it comes to Trump, Congress, the Federal Reserve, tax laws, Social Security, health care and anything or anyone else you feel influences the market. I genuinely respect those sentiments. I too have opinions on such things, but those thoughts are beside the point of what we're trying to do here, which is to continually assess the stock market and make wise decisions when it comes to investing and financial planning.

If I reference a specific politician or law, consider it a reference to the facts themselves rather than a personal referendum or opinion.

In Our Portfolios...

Q&A/Financial Planning...

When is the best time to invest?

I have heard this question often over the past year, from people who are able to invest but have not done so. Despite being ready and able, they refrain for whatever reason -- usually because they fear the market is due to fall.

The short answer is, there is no "best time" to invest. I say that as someone who analyzes the market every, single day of the year. The way I see it, if you continuously invest -- whether through monthly deposits or infrequent lump-sums -- you are going to win some and you will lose some. Meaning, some of the time your money will invest closer to a market top while other times it will invest closer to a market bottom. The market has a bias to go up over time, so the long-term odds should be in your favor.

I would add though that when managing accounts we are judicious about when to make allocations. For example, if you open a new account or add funds to an existing one, we won't necessarily immediately invest all of the funds. It may be more pragmatic to wait until the prices of the investments we seek to buy come back to a level that makes sense to do so. I would not recommend doing this with your 401k, for example, because chances are you do not monitor the ebbs and flows of the stock market.

What's New With Us?

No new news on our end. Have a great weekend!

Betz Signature 250px.png
 

Brian E Betz, CFP®
Principal

If North Korea Goes Nuclear, Will The Stock Market Follow Suit?

/ Percension Wealth Advisors, LLC/

In The News...

One story has dominated the headlines recently, both inside the market and out: North Korea.

So far it has only been a war of words between President Trump and North Korean leader Kim Jong-un, which, I'm sure most of you already know. Onto why it matters...

How does North Korea affect the market? No one knows. International conflicts tend to have more short-term than long-term impacts, but it is impossible to know how much events like these influence investors. The conversation immediately goes to the worst-case scenario of outright nuclear war, which is no doubt a scary proposition but also a pretty hasty conclusion when used to influence investment decisions.

Historical comparisons: Although there is no good comparison to a potential U.S.-North Korea conflict, here is some context. The S&P 500 fell -4% the day after Pearl Harbor (which occurred on a Sunday) and -20% in total before bottoming out. The S&P fell -5% the day the market reopened following 9/11 (market was closed for 4 days). It fell a total of -13% before bottoming just 10 days after those Sept. 11th attacks. Interpret these losses as you wish, but the point here is that they weren't as catastrophic as we might have presumed they would be. 

Conclusion: Nuclear war is clearly another level of potential disaster, which makes North Korea very concerning. But we as investors must keep a level head and stick to our process, particularly in the age of the 24/7 news cycle. Reacting to every statement, ad-lib or Twitter-post is a bad investment strategy and an even worse way to live your life. The long-term trend of the stock market has been rising for nearly 1 year and we will give that trend the benefit of the doubt until our analysis suggests it is otherwise broken.

In The Market...

The S&P 500 slid -1.3% this past week. Let's look under the hood:

(price data via Yahoo Finance)

Stocks: The bad news is, this was the worst week for stocks in nearly 5 months. The good news? The S&P 500 was only down a little more than 1%. I have mentioned how this is seasonally the worst time of the year for stocks and that appears to be taking shape. Nearly every sector was in the red, except Consumer Staples, which eked out a fractional gain.

Bonds: Stock market pain was the bond market's gain. Treasuries rallied for the second-straight week, which is the silver lining this week given that most accounts own Long-Term Treasury bonds (TLT). Perhaps most concerning for stocks is that both High-Yield bonds and Preferred Stock were each down over -1%. High-yields, in particular, often serve as a beacon for what is in store for stocks.

In Our Opinion...

Do stocks have a case of bad breadth?

If recent stock market losses are more than merely the seasonal volatility we see around this time of year, there is one indicator that may tip us off: The percent of stock prices above/below their respective 200-day moving averages. Also referred to as "breadth".

I track this ratio for the entire S&P 500, as well as for each of the 10 major U.S. stock sectors. The 200-day moving average is, for my money, the best long-term price indicator there is. When the price of a given stock, sector or index is above its 200-day average, that is bullish. If the 200-day average is rising (rather than flat or falling), that is doubly bullish. The opposite is true too. If the price is below and/or the slope of the 200-day moving average is falling, those are more bearish scenarios.

Here is a sector-by-sector look at where each breadth ratio stands (also included are the two major indexes we track -- the S&P 500 and Nasdaq-100):

(percentages via stockcharts.com)

Currently, 68% of stocks in the S&P are above their 200-day moving averages (the second column of percentages). This is the lowest ratio since Jan. 2017, yet it is still above 50%, which is the threshold where problems start to occur (and fast).

I included the breadth ratios from the most recent high back in late-February (first column of percentages), when 82% of stocks were above their 200-day moving averages. The S&P has risen roughly +5% since that time, despite breadth falling across every major sector. This type of divergence between rising prices and falling breadth is potentially a signal that momentum is waning. Whether it results in a significant decline from here, or presents another buying opportunity instead, time will tell.

In Our Portfolios...

(Note: Each client's account is uniquely managed, based on account size and risk tolerance. Your account will only own some, not all, of the investments bought and sold over time.)

Q&A/Financial Planning...

Buy or Build? That is the question...

I have spoken with more than a dozen clients and friends in the past few months who have undergone, or are considering, a home remodel. Some of the reasons include a growing family, the desire to make certain modifications, or simply having more money and real estate equity today to play with.

A home renovation makes a lot of sense, but is it preferable to selling and buying a different home?

The short answer is to "do you". In other words, do what fits you. Some of us are more inclined to go through a remodel than others. The same can be said of moving. Before you decide, consider these questions first...

Home Remodel:

  • How extensive are the renovations you need and want? The more there are, the more it might make sense to sell and buy something else.
  • If you will be displaced from your home, how long will that be? How might that affect your calendar of events during those weeks/months?
  • What are the risks that your remodel runs over-budget or past-deadline? The former is a financial problem. The latter is simply annoying.
  • Which renovations will add value to your home (e.g. increased square footage) vs. those that are purely for personal pleasure? Be realistic when it comes to added value...
  • How much could life change post-remodel that might necessitate further renovations?

I believe remodeling makes sense if you are determined to stay in your home for a prolonged period (more than 10 years). Or, if there are certain aspects of your existing location that you cannot live without, such as the specific block you live on, your view or the nearby schools.

We have never personally remodeled, but nonetheless, I would recommend starting with a small project and expanding from there. So many people blow their budget, which is understandable when you start rationalizing tens of thousands of dollars.

"Well we are already spending $30,000... what difference does it make if we spend $35,000?"

Those dollars add up even if they seem arbitrary. This means either more debt or less cash/liquidity in the bank.

Sell & Purchase:

  • How does current financing compare to your existing mortgage? If rates have gone up so too will your interest payments.
  • How do the non-house-specific factors compare? Such as neighborhood, schools, growth potential, proximity to work, crime, etc...
  • If you use most/all of your existing home equity toward the next home, your liquidity worsens even though your net worth stays the same.
  • If you are moving a good distance away, are there life factors that may necessitate you move back in the future?
  • How emotionally tied are you to the house? This may sound silly to some, but the less emotional you are about the property the easier it will be to list it.

There is no right or wrong answer here. It is all case-by-case. Notice I did not tackle the third option: Purchase a new home and rent-out your existing one. This carries greater complexity than the two other options. I am happy to discuss this with you if you plan to buy and keep your existing home as a rental.

What's New With Us?

Some of you have noticed that you still have an active account with Scottrade, reflecting a zero balance. This is not an error. All Scottrade accounts will be dissolved by mid-October. There is nothing that you need to do, as account information such as tax data was transferred to TD Ameritrade at the same time we moved account funds. If there are specific Scottrade records you want, such as old 1099 tax forms, let Gale or I know.

Have a great weekend!

 

Brian E Betz, CFP®
Principal

Nuclear Fear Has No Place Here, But The Market Is Starting To Shake

/ Percension Wealth Advisors, LLC/

In The News...

The U.S. market has spent much of the year at cruising altitude. It may now be nearing some turbulence.

Last Monday I shared a chart of the S&P 500, showing how short-term market momentum was starting to fade. That continued into last week as the major stock indexes were down more than -1%. Stocks have stumbled out of the starting blocks in Q2, but nothing too dramatic as of yet. To a large extent this type of volatility is pretty normal and expected.

Nuclear Fear: This happens to be occurring as tensions rise between the U.S. and multiple nations -- Russia, North Korea, China. Threats of nuclear force are back, particularly as North Korea vows to conduct its 6th nuclear weapons test - the first of such during the Trump presidency. The U.S. appears to be back at odds with Russia over the Syrian conflict.

No one knows how these situations will play out, but this is a good reminder that news follows market prices. Meaning, market volatility usually shows its face prior to the newsworthy events that many use to explain the volatility. The point being, if you think a global event will influence the market it likely will do so before it happens, so investing in a reactionary manner is diminished. Also, the market has a way of surprising us, so even if you think stocks/bonds will respond a certain way you better be careful (two recent examples of this were Brexit and the U.S. Presidential election).

As a result, we are not in the business of predicting world events. We do not manage investment accounts according to what we think may happen and we certainly do not let the news dictate our approach.

In The Market...

The S&P 500 fell -1.1% last week. Let's look under the hood:

(data source: Yahoo Finance)

Stocks: A rough week for stocks, which I wrote we might see coming off the previous week. Frankly, if we don't see a quick bounce I believe the S&P could dip another ~3.0% or so before finding some cushion and rallying back. Last week's activity was classic "risk off" investor behavior, meaning investors sold riskier investments in favor of more stable or defensive ones. Seven of the 10 stock sectors were negative, with only REITs, Utilities and Consumer Staples finishing higher.

Bonds: Arguably the best week of 2017 for the bond market. The 10-year Treasury yield fell to 2.24% -- the lowest interest rate for a 10-year Treasury bond in 5 months. Which reminds me...

Forget the Fed: I don't often go back and cite previous analysis, but this one is pretty glaring and important. Recall last month when the Federal Reserve decided to raise short-term interest rates on March 15th, I said that long-term interest rates may actually go down based on historical trends. Here is what I wrote at the time if you would like to see my reasoning.

Fast forward to now and let's see how the interest rate on the 10-year Treasury bond has changed:

March 15th: 2.60%
April 14th: 2.24%

Long-term interest rates not only fell as I had suggested they may, but are the lowest they have been since the presidential election. This is yet another reminder -- backed by facts -- that the bond market and interest rate behavior is dictated by investor supply and demand, not individual Fed rate hikes or anything else. In this case, investors have chosen to buy bonds (for whatever reason) and that has pushed interest rates lower, which literally and ironically started the day after the Fed raised interest rates on March 15th.

For what it is worth: One of the things I do each day is scan the entire S&P 500 through a variety of statistical parameters. I do this to gauge the overall pulse of the U.S. stock market. If any of those 500 company stocks meet those parameters, they appear on my "buy list". This does not mean I actually buy them. It just puts them on my radar and helps me see which market sectors are leading vs. lagging.

I particularly do this on Friday, as I focus on where the market resides at the end of the week. Normally there will be anywhere from 70-130 stocks that show up in my scan. The greater the number, the more bullish the reading (and visa-versa). Last week, only 25 stocks appeared on my scan, which is just 5% of the S&P 500. That is very low and a bit concerning, but of course things could rebound quickly.

In Our Opinion...

Utility hitter: We added a Utilities sector fund (XLU) to most accounts this past week. I thought I would share a look at why by getting technical here for a moment. Below is a weekly chart of Utilities. Each "candlestick" represents a given week dating back to 2011. Weekly charts are the foundation for our analysis because they represent our preferred investment timeline, which is weeks/months rather than days (too short-term) or years (too long-term).

(chart created via stockcharts.com)

There is quite a bit to like about Utilities. First, the obvious price uptrend. The rising price pattern is consistent, which aids predictability. Second, momentum has remained strong as measured by Relative Strength (RSI), which is the chart above the price chart. We like to see RSI hold above 50 and ideally float within the 60-70 range. Finally, I shaded three previous points in time where I feel the historical price patterns resemble where this fund is at today. In all three of those instances Utilities stocks have rallied higher. That is what I'm anticipating and these are some of the reasons why we chose to purchase Utilities.

From time to time I like to share the analysis that goes into our buying/selling decisions. We have a well-defined process that relies solely on our own research and analysis. Hopefully you find this valuable.

In Our Portfolios...

Stocks: We bought a Utilities fund (XLU) across all client accounts. The allocation size of this new investment ranges from 13% to 35% of the total account, depending on your specific portfolio.

Bonds: No major changes last week.

Q&A / Financial Planning...

Check your bank statements: What I am about to explain is petty, but hear me out. When I sold my car last month the buyer paid me cash. After I deposited the money into our bank account I was charged $15 for doing so. Think about that... I was charged money for putting money into my own account that is set up for the sole purpose of holding money.

When I called to inquire, the bank rep said she could refund 75% of the charge, as that was the amount "the system would allow". Did I haggle over the remaining $4.00 or so that was not going to be refunded? You bet, purely out of principal.

I'm not sure which was more shady: The fact my bank charged me a fee in the first place, or, their B.S. refund protocol. I am sure thousands of consumers would never notice this type of charge, and of those who do, many of them would likely accept the partial refund and consider it a win. After very little arm-wringing and the rep's effort to "escalate the request and override the 75% default", I was refunded the $15 in full.

The bank probably assumes its customers will call, but they probably also assume that most consumers psychologically won't feel compelled to ask for the full refund if they can recover 75% of it. I couldn't have cared less about the $15 but the business procedure was so ridiculous that I had to call. I would encourage you to check your bank statements from time to time, especially as banks seem to be searching for new ways to generate revenue from their customers.

What's New With Us?

Individual tax returns are due this week (April 18th). Let Gale or myself know if you have any last-minute questions. Happy tax filing!

Have a great week everyone!

 

Brian E Betz, CFP®
Principal