Historically, December is the best-performing month for the S&P 500. However this year, it looks like December is playing the role of the Grinch and leaving us all with a big lump of coal in our stockings! In addition, this year (2018) is shaping up to be a down year for the markets and not only that, but a year in which nothing worked. Except for cash that may eke out a 1% return for the year, every other asset class is down….stocks (small and large); bonds (munis, treasuries and corporates); gold, oil and other commodities; international and emerging markets, real estate…everything except for cash. While I recognize that markets go up and markets go down, this latest downturn and the current market sentiment seems completely misaligned with what most economists expect for next year. Yes, earning growth will slow in 2019, but most analysts are predicting a very solid 8-10% growth in corporate profits next year . (In 2018, corporate profits were up 20+%, helped to those lofty levels by the tax reform.) So it’s difficult to understand why the market would sell off to such an extent with most economists predicting continued growth.
Beyond our study of the fundamentals of the economy and corporate profits, we also follow a variety of technical indicators that provide insight and perspective on market activity. Below is a technical analysis that you may find encouraging – I do.
We are as ready as you are for this uncomfortable market correction to be over and look forward to the good times that we know could be ahead. Thank you as always for your trust and confidence in us. Please let us know if you have questions or concerns.
Wishing you all good cheer as you enjoy the holidays with family and friends!
Technical Analysis
The NYSE Bullish Percent is our guide to risk levels in the U.S, equity markets. It reversed back into a column of O’s earlier this month and has continued to move lower, down to 22% yesterday. The columns of X’s head north and show demand in control, and the columns of O’s head south and show supply in control. Prices are rising when demand is in control and falling when supply is in control. The second reversal to O’s isn’t too surprising, especially given the fact that historically, the initial reversal up from 30% does not tend to be the last. Indeed the indicator hit 30%, reversed up again to 38% as you see here on this chart dated November 21st, and now has reversed back into O’s and fallen to 22%. When we have looked back at this important indicator over the past 63 years, it has produced a couple of reversals up and down before finally bottoming … every time. See the chart below.
The 30% and below level is looked at as the green zone on the NYSE Bullish Percent, and we have historically seen some of the best buying opportunities come from below the 30% level; however, trips to these levels are often uncomfortable. This one certainly has been uncomfortable. One way to quantify the “uncomfortable” nature of the markets while the BPNYSE is at or below 30% is simply by looking at the standard deviation (or volatility) of the market. Current volatility is at 27.06, whereas levels in 2017 hardly got above 10 or 11 on the VIX scale.
This is one way to quantify what we have all been feeling over the past couple months in the market. What this also suggests is that we are not likely to see the volatility in the market go away overnight, but we will continue to watch this indicator specifically over the coming days, weeks, and months. A reversal back up from here would be a very positive sign. Historically, great returns have occurred from this level.
Another indicator we look at to measure the overbought/oversold state of the market is the NYSE High Low Index, which is a 10-day moving average of those stocks in the NYSE that are making new highs relative to those that are making new lows. This reading most recently crossed back below the 10% level, which is typically considered the threshold where we would begin to look for a reversal back up. If we take a look at the daily calculation used in the 10-day moving average, we find that each of the four trading days this week are actually in the 30 lowest daily readings we have seen in the history of the indicator. The other days on this list were found close to or at market bottoms around 2008, 2009, 2011, 2015, and 2016. If we look at the average return of the S&P 500 one year out from the calculations depicted on the table below, we get an average return of 37.65%. Even if we take out the forward returns from 2008 and 2009, we are still left with an average return of 18.55%. While we cannot know with certainty whether we are currently at or near a market bottom, we do know that such washed-out levels of the HILO indicator have historically preceded periods of positive market returns.
