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:

(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

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®