In our previous post the S&P 500 had just slid 3% and FY18Q3 earnings were just about underway. Today, the S&P 500 closed 27 points below the close of the original 3% slide and it has been quite a choppy ride since then, to say the least. We advised a sideline/neutral mentality as volatility in the market and indecision across investors began to ramp up.
In that time, there was a glimmer of hope with a strong few days of rallies off recent lows breaking above the 2800 level, only to just drop the ball and slide back near where the S&P 500 opened the year (2683.74). The market is through the major wave of Q3 earnings and mid-term elections and the horizon does not look much clearer. While it is not bleak (as sentiment has not shifted quite yet), the market conditions are quite adverse for maintaining a position in either direction.
Q3 earnings pointed towards confirmation that there are significant headwinds from the strong USD and trade disputes across the globe. This continued to rattle investors until the selling ran out and a Democratic House and Republican Senate unfolded causing the market to rally (there is a theory that equities like when the government is at a consistent stalemate). While these fundamental aspects of the market cannot be ignored, we at DAM are always a big fan of interpreting price action – the markets response to these events.
Should we see the S&P fall below the low of the prior decline (2603.54), this could signal much more significant downside to come in the US equity market, even the global equity market. What will dictate a large move in either direction (which could unfold in days to the downside, or months to the upside) is a change in market sentiment. Retail, institutional, and independent investors/traders all seem to be on the same page right now with a timid and cautious approach to entering new positions. Where things can change drastically (and cause large scale declines and bear markets) is when sentiment across the board begins to shift radically. Everyone seems to head for the door all at once and steep declines which are effectively impossible to navigate ensue. Now, this shift is subject to what transpires in the coming days, weeks, and months, but at this time, there still remains a not quite bullish, not quite bearish undertone to the overall market.
As we say that, some of you might be thinking, “well what the hell, I’ve watched the market drop consistently for the last month and a half, when’s it going to go up??” Looking at a 20 year weekly S&P 500 chart really demonstrates how little the market has moved overall compared to prior declines and bear markets (most notable are ’00-’03 and ’08-’09). It should also be noted that there was similar price action towards the end of 2015 and beginning of 2016 that even felt a lot like what is transpiring right now. The market broke some longstanding and significant trends only to regain its ground a few months later and continue to trudge higher. The reason we show this chart is twofold; first that investing in equities is a long-term ordeal, second is that market gyrations should be taken with a grain of salt. Significant opportunities can present themselves when a reasonable decline occurs in the market.
To be honest with everyone, there is some conjecture among institutional “pundits” that we are nearly due for a bear market anyway and the same individuals are speculating a US recession will occur sometime in the next two years (well isn’t that helpful…). While these individuals cannot be ignored by any means, we have significant disdain for the hot shot analysts of the world since no one really ever checks if they’re correct. It’s very easy to shout from the rooftops that the sky is falling for years until… one day it does and lo!
I digress.
While we are certainly not bullish, we are not bearish either. We believe the market has yet to make up its mind and it might not for awhile. The next big event on the horizon is the G20 summit where Trump is supposed to discuss trade with China’s Xi. However, there is a belief that the best outcome is a stalemate and the worst outcome is bordering on a cold war. This still is not for another two weeks, so in the meantime, hang on tight and keep a skeptical eye on the headlines. In the grand scheme of things, the recent move is not yet significant enough to warrant substantial concern.
“The stock market is the pulse of our economy.” – Unknown