“The price we pay for the higher returns that stocks have delivered over time is the uncertainty of when those returns will come and the volatility of the journey” Rod Smyth of RiverFront Investment Group
Despite the solid rally in equities on 9/30/15, the U.S. equity markets (basis S&P 500) had their worst quarter since 2011.
I have previously written that the process of establishing a low in the stock market is one of price and time. The selloff on Monday 9/28/15 brought the market down to retest the lows from 8/24/15 of 1,867.01 (intraday low on 9/29/15 was 1,871.91). The rally on 9/30/15 was most likely ‘window dressing’ at the end of the quarter by portfolio managers.
So was this a “successful” retest and are the lows in for the year? It’s too soon to tell. A double bottom pattern, as defined by Investopedia: “The double bottom is formed when a downtrend sets a new low in the price movement. This downward move will find support, which prevents the security from moving lower. Upon finding support, the security will rally to a new high, which forms the security’s resistance point. The next stage of this pattern is another sell-off that takes the security down to the previous low. These two support tests form the two bottoms in the chart pattern. But again, the security finds support and heads back up. The pattern is confirmed when the price moves above the resistance the security faced on the prior move up. Remember that the security needs to break through the resistance line to signal a reversal in the downward trend and should be done on higher volume.”
To follow the “normal” pattern, the market now needs to rally and get above approximately 2,021 to confirm the “W” pattern. (source: Raymond James & Associations)
If that happens, perhaps the pattern of the last several years will repeat. Please note: we need a 7.2% rally from the 9/30/15 close to breakeven for the year. I think this is possible but I remain cautious.
(source: Yahoo Finance)
On the economic front, recent U.S. economic data has been mixed. (source: CNBC)
- U.S. GDP (gross domestic product) for the 2nd quarter of 2015 was again revised higher to 3.9% (from 3.7%) driven primarily by an increase in consumer spending.
- Even with the recent stock market volatility, consumer confidence increased in September.
- In September, U.S. auto sales had best month since July 2005.
- In August, pending home sales and orders for durable goods declined 1.4% and 2.0%, respectively.
- Perhaps most importantly, a disappointing jobs report for September.
The outlook for the global economy is not as promising. On Wednesday 9/30/15 the IMF (International Monetary Fund) Managing Director Christine Lagarde stated “On the economic front, there is also reason to be concerned. The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility,” she said. “There has been a sharp deceleration in the growth of global trade. And the rapid drop in commodity prices is posing problems for resource-based economies.” Concurrently the World Trade Organization (WTO) said it sees world trade growth of 2.8 percent this year and 3.9 percent in 2016, revised down from the forecasts it made in April of 3.3 percent and 4.0 percent, respectively.
On the geo-political front, there are 2 main issues:
- Congress managed to avoid a government shutdown on 9/30/15 but only for the next 3 months (thru 12/11/15).
- Russia taking military action in Syria is a concern.
So in summary, I remain cautiously optimistic on the U.S. economy and financial markets but am keeping a close eye on key levels on the S&P and US 10yr Treasury. I expect volatility to continue at elevated levels. I will be in touch with you if I feel any action is necessary. Please call me with any questions or concerns.
October Calendar of Events (comments and additions for future months are always welcome)
October is Breast Cancer Awareness and Domestic Violence Awareness month.
October 12th Columbus Day
October 15th Medicare open enrollment thru 12/7/15 – you can switch from original Medicare to Medicare Advantage, or vice versa. You can also switch from one Medicare Advantage plan to another, or from one Medicare Part D (prescription drug) plan to another, or drop your Medicare Part D coverage altogether.
October 22nd National Nut Day – only in America can you have a day to celebrate nuts. Ps: peanuts are legumes, not nuts!
October 31st Halloween
Sources: RiverFront Investment Group, Raymond James & Associates, CNBC
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