Market Keeps Hitting A Wall... What Now?

In The News...

Here are two numbers worth seeing:

Stock returns from Nov. 4th last year thru March 1st: +16.0%
Stock returns since March 1st, thru May 19th: +0.0%

That is right, U.S. stocks have gone nowhere the past 2.5 months since rallying hard post-election (per S&P 500%). I am not surprised, as I wrote back in mid-March that I felt this would be the case. Here is a visual look at how the S&P index hit a wall right at 2,400:

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(chart via stockcharts.com)

I want to highlight the chart below the big chart above, which shows the percent of S&P 500 companies whose stock prices are above their 200-day moving average. This number is gradually declining and is currently at 67%.

Why does this matter? Because many investors (our firm included) does not like to buy/own stocks that are below their 200-day moving average. The 200-day serves as widely used barometer for a stock's long-term trend, in attempt to predict whether the price will move higher or lower in the future.

Why 200 days? Why not 150 days? Or 175 days? Or 250 days? I'm not sure, but it is one of those things where, if the 200-day matters to other investors, then it matters to us because it helps us anticipate what investors might do in mass. When investors act in mass that really catapults the market in one direction or the other.

I believe the market will continue to be choppy for the next couple months. This means we could see some bigger weekly gains followed by bigger weekly losses. Seasonally this would make some sense too as volatility usually increases in the summer months.

In The Market...

The S&P 500 fell -0.3% last week. Let's look under the hood...

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(data source: Yahoo Finance)

Stocks: Last week's losers were this week's winners, namely Utilities (XLU) and Real Estate (VNQ). For only the second time this year, the S&P 500 fell in consecutive weeks. Financials were the biggest loser, as interest rates fell on the week. Which reminds me...

Bonds: A very nice week for bonds, which were up nearly across the board for the second-straight week. If you remember what I wrote two weeks ago, I showed a chart of the long-term Treasury bond fund (TLT) and suggested that it might be due to rally and rates would, consequently, fall. So far that is exactly what has happened. Our investment-grade bond position has benefited from this recent Treasury rally, as it possesses similar investment characteristics to Treasuries.

In Our Opinion...

A couple people called asking how the President Trump/Russia investigation might influence the market in the weeks ahead, especially as stocks fell nearly -2.0% on Wednesday after the news broke.

A friendly reminder: Ignore it. As I have written at-length, it has very little impact on long-term market movement. Binary events like this investigation can certainly influence the market in very short-term stretches (days), but they do not over the course of weeks and months. Everyone is entitled to their opinion, but in the same vein that Trump is not the reason the market rallied post-election he would not be the reason to explain a potential sell-off. To assume as much would be to conclude that every investor is thinking squarely about this investigation when they buy or sell securities. They are not.

In Our Portfolios...

Stocks: We sold our Consumer Discretionary fund (XLY) within many client accounts. My intention is to sell it for every client account. Some accounts are in the process of transferring from Scottrade to TD Ameritrade, which means those that own XLY will have to wait until such transfers are complete. Technology and Industrials remain the two sectors we are most likely to buy in its place.

Bonds: We sold our preferred stock fund (PFF) within many client accounts. (This is the same situation as just mentioned regarding transfers.) We will likely buy either investment-grade corporate bonds or long-term Treasury bonds in its place, depending on the specific account.

Q&A / Financial Planning...

I encourage you to read my latest blog post: Your Most Important Job Before Retirement. I outline 10 financial planning areas that you should prepare for if you are getting close to retirement.

1. The Nest Egg
2. Retirement Spending
3. Retirement Income
4. Social Security
5. Health Care Costs
6. Long-Term Care Insurance
7. Investing Needs In Retirement
8. Housing Plans
9. Managing Debt
10. Life Insurance

What's New With Us?

If you electronically signed your TD Ameritrade account transfer request this week, your account(s) should migrate over to TD sometime next week. Some accounts have already made the move. I will provide everyone with specific login instructions soon. You should also receive login instructions in the "welcome letter" you receive by-mail. So I would recommend that you not immediately throw away that letter when it arrives.

Let me know if you have questions about this transition. I appreciate your cooperation in advance for any hiccups we might experience along the way during this process.

Have a great weekend!

Brian E Betz, CFP®
Principal

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

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:

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(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).

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(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