October 2018, historically a scary month for investors, did not disappoint in terms of bringing on an increased level of volatility to the market, which often delivers many new opportunities to invest at lower prices. February and October are usually the worst-performing months of the year. Typically, in the month of February, after a good rise in prices from November through January, investors and traders often sell to take profits. This past February was no exception, with the markets falling about -11.5%.
Then typically in October, fund managers and investment managers sell laggards that have dragged the market as well as leaders that have run up in price and reached buying climaxes where the risk/reward ratio moves to zero. The managers move to cash and plan to reinvest into a lower-priced market – which they themselves caused – so that they are prepared to participate in the normally good months of November, December, and January. Again, this past October was no exception. The S&P 500 was down about 8% for the month, but underneath the surface, we have seen many individual stocks and the tech-heavy NASD index corrected by double digits. Amazon was down more than 20% for the month, and Facebook and Alphabet were also each down by double digits. The result of the recent market volatility is that many of our equity indicators, like the NYSE Bullish Percent and the NYSE High Low Index fell into oversold territory and to their lowest levels since early 2016. During this past month we raised cash, selling both laggards and leaders, just like other money managers, and have been putting it back to work as opportunities arise.
This has all come within the context of US Equities continuing to hold on to the number one ranking within the Dorsey Wright Dynamic Asset Level Investing system, which has been the case every day since August 2016. There is no doubt we are operating in an interesting time that shows a positive long-term relative strength picture for domestic equities, with an oversold to washed-out condition for many of the equity risk indicators, and volatility is at the forefront of investor minds these days. One way to look at volatility is through the CBOE Market Volatility Index (VIX), which spiked up to a recent high of 28 after spending most of the year below 20. Another way to look at volatility is through the simple idea of how many days the market has moved by 1% or more.
For historical perspective, see the chart below. On February 28th of this year the VIX stood at 19.85. Over the years, it has ranged from 9.14 on November 3, 2017, to 80.86 on November 20, 2008. The all-time average is 19.35. The all-time low occurred in the past five years, and the five-year average is 14.49. Today, November 1, 2018, the VIX sits at 19.34.
Sometimes it just feels worse than it is. We do not try to time the markets based on the short-term indicators even when we know that there might be pullbacks along the way. We are focused on participating in the long-term up markets and trying to avoid the longer term crashes. We do not see such a crash on the horizon at this time. Thank you for your continued trust in our abilities and confidence in our system that we promise to follow.
