Today’s blog includes the commentary from my Tuesday BNN show notes – and I’ve added some charts that support that commentary.
FYI, here is the link for the show.
Here’s some scary statistics that might horrify you ever more than running out of candy for shell-outs on Halloween night:
- President Trump’s approval rating has just dropped below 35% according to Gallop. According to sentimentrader.com, the S&P500 has, since 1937, lost an average of 1.6% in the following month after trading at all-time highs and a president’s approval rating drops below 35%. Fear the demise of a president’s popularity—it can cost you almost 2% of your portfolio!
- Again, from sentimentrader, the market, like most scary monsters, has bad breath (breadth, actually). The recent highs on the S&P 500 was led by very few stocks- only 2 other times in history have we seen a new high on the index with so few new highs within its components.
- The last time the NASDAQ had such narrow leadership (breadth) was in the year 2000. Those who were invested in tech stocks that year may feel a Halloween chill up their spine when they hear this fact!
- More than 20% of the S&P500 is comprised of 5 stocks—AAPL, MSFT, FB, AMZN, GOOGL. The NASDAQ’s top 5 stocks, making up some 40% of the index, are completely different. They are AAPL, MSFT, FB, AMZN, GOOGL. Hey – wait a minute! That sounds like both large capped stock market indexes (to which all US portfolios are judged against) are leveraged to the success of 5 arguably overbought, single-sector (tech) stocks. Now that’s kinda scary!!
- The S&P has closed lower 1% or more only four days this year — the fewest for a full year since 1964 according to LPL Research. In fact, in any given trading year, stocks will fall by more than -0.70% on 43 trading days on average according to US Portfolio Manager Eric Parnell. But this year, we are on pace for just 5 (including last Wednesdays 0.8% drop) , which represents about 2% of all trading days for the year.
- Note the RAF regression lines on the S&P chart below. Since early 2017, up/down swings have disappeared. Compare the past year to the prior up trending leg that led into the 2015/2016 pause. During that up leg, there was a more traditional level of up/down volatility with swings of 1% + occurring regularly. You can see this via the wider RAF lines. Stocks should regularly experience healthy corrective periods. So, isthis time different? Will we continue to experience a market that rarely if ever drops 1% or more in a day – let alone multiple days of corrective action? John Templeton once told us that those four words (this time is different) are the “scariest” words for any investor to believe. History does repeat itself. The longer it takes for one to happen, the worse it may be
- Finally, the markets latent disregard for horrifying world events (everything from North Korean nuclear threats to an impeachment of the President) is showing through a constantly low VIX level. My studies show that prolonged VIX readings averaging around 12 or lower tend to suggest complacency, and that condition, if seen for too long of a time, eventually leads into bear markets.
We’re buying select stocks and ETF’s as the “Best 6 months” seasonal period gets under way. But we still hold some cash on the sidelines to stay comparatively defensive and to take advantage of a higher than average potential for a pullback. Further, we have a tight sell discipline in place should things turn ugly. We remained more than a little spooked by this market!