5-Minute Market Commentary // September 7, 2015
I am happy to present this week’s market commentary from FormulaFolio Investments. The goal is to give our clients and friends a simple way to see everything they need to know about the financial markets on a weekly basis, in 5 minutes or less. After all, finances should be simple, not complicated.
Last week I wrote:
This week marks the end of August, and almost certainly it will end with most stock indexes down a good amount (for the month). It also is pretty critical what happens on Monday as the 50 day market average is just a hair lower than the 200 day market average. This is called the “Death Cross” and historically, pretty much every large scale market loss was preceded by the occurrence (Black Monday of 1987, Dot Com crash of early 2000’s, and Financial Crisis of 2007-2008 just to name a few). If the market is flat or down on Monday, the month ends in Death Cross zone. If it’s up a hundred points or more, then the month ends outside the Death Cross zone.
This is important because there are many tactical asset allocation managers, market timers, and technical traders out there that will automatically start selling their stock holdings if we drop in the Death Cross zone. If the larger investors start to sell, it can get ugly fast, which we saw just a couple weeks ago.
So I’d say Monday is pretty important as a tone setter for the rest of the week, month, and possibly the year.
Turns out I was correct, and the markets sold off badly to start the week (then traded mostly flat the next 4 days).
Lesson to be learned: Sometimes we should be careful what we write.
FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear). In future posts I’ll write more about how these indicators are built and why we feel they are important.
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull / Bear indicator we want it to be at least 67% bullish. When those two things occur our research shows market performance is strongest and least volatile.
Since last weeks update our US Equity Bull/Bear Indicator went from 33% Bullish / 67% Bearish to 100% Bearish. Historically, this means our models are think there is a higher likelihood of stock market declines in the near term future (think <18 months).
Nearly all US Equity markets are officially in a “correction” – as defined by a 10% or greater decline from their all-time high. If they continue to drop, the next stop would be a “bear” market – defined as a 20% or greater decline over a 6 month or longer time frame. What are the odds this will happen? According to Sam Stovall, the Chief Economist at Standard and Poors, about 40% (based on all corrections and bear markets since 1945).
So this is pretty interesting. There’s a 60% chance the worst is over. There’s a 40% chance of 10% or greater declines. What’s that supposed to tell us?
In my view, it means we should be defensively invested. In other words, don’t abandon ship, just make sure it’s sea worthy.
We can do this by having a solid long term plan, understanding how much risk we really need to take, then take no more than that. With our longest term assets (stocks, bonds, etc) we can adjust our allocations to something a touch more conservative (we already did this at FormulaFolios a few months ago), and then wait until we feel comfortable before taking more risk in the future. Investing really isn’t that hard. We just have to have the mental strength and intestinal fortitude to follow a plan we know should work (not easy to do).
More to come soon. Stay tuned.
Chief Investment Strategist