You probably want to know what to make of the recent stock market declines.
The S&P500 abruptly gave up 6.13% in value over the past two trading days, February 2 and 5, 2018. Read on, we are going to share some insight.
The Market took a dive!
How did we get here?
In our view there are two economic reasons why we saw this decline. One is heavy selling of 10-year US Treasuries forcing rising bond yields, and raising interest rates upwards towards 3%. The perception is that higher rates squelch corporate earnings potential. The second factor is: Stock market strength may yield extra Federal Reserve rate increases over-and-above what was previously expected. Both scenarios represent challenges to corporate profits, with obvious drag on stock prices. A generally-ignored consequence of this interest-rate rise is a substantial increase in the Federal Government’s borrowing costs, but the market typically ignores this rather weighty political element.
A Key Takeaway
The very abrupt rise in stock prices since January 1, 2018, countered by the sell-off in the past couple of days still does not revert the S&P500’s closing price to its mean. If the market drops below ~2,500 we would consider that a possible change in the longer-term trend. Today, the S&P 500 closed at ~2,649. It is notable to us that the Index has not broken through either its 50-day or its 200-day moving averages, suggesting that even with this dramatic drop, the market is still on the plus side of momentum. To put this drop into perspective, the price of the S&P500 has increased by ~261% since it bottomed at a valuation of 1,111 on March 6 2009. [source Google finance]
S&P500 since March 2009
Is this an Apocalypse or not?
The CBOE volatility Index, the VIX has been running at about 15, now more than doubled to 37+ in the past 2 trading sessions. Comparably, the 1987 market crash saw the VIX above 150 and the 2008 crash saw vix at above 90. [Source CBOE] Despite the drama, our opinion is: We have not witnessed an apocalypse, at least not yet.
The VIX Over a 10-year Period
What’s our forecast?
The CFS Price CycleTM internal forecasting identified entrance into a Business Consolidation Period expected to last approximately 2.5 years. It began in the second half of Dec 2017. This very well COULD produce a change in the price trend. We have examined this development and it’s potential in considerable detail. Our observation thus far, is that the cycle generally neutral, because it produces extremes on both sides of price behavior, ranging from “pain to pleasure.” Neutral does not necessarily mean flat prices. We could generally forecast global price consolidation during this cycle, but history is not conclusive that a down-period is the only possible outcome. NONETHELESS, watchfulness is warranted, because a change in the Cycle cannot be ignored. Historically, periods of Consolidation tend to provide opportunities that otherwise would not exist. These often take the form of mergers and creation of powerful and profitable entities. In fact, reports are that M&A activity is super-hot with the inception of 2018. Meanwhile under consolidation, some existing entities face challenges, thus they must to “prove their worth.” The axe will fall on those who don’t.
What are we doing right now?
Changes to accounts participating in our DYNAMIC PORTFOLIO (DP) are currently on hold pending further observation of market behavior. This “on hold status” is also the case where new cash has been added to accounts. Based on our sell discipline, we place DP positions on ALERT status should we see positions drop >8% from high-water-mark. Of the 12 DP positions, we currently have 2 positions that have just entered into Alert status. The money manager’s challenge in an environment like this is to avoid being emotional, reactive, or trigger-happy. However future days’ trading action might justify some raising of cash in the DP, not thru a wholesale liquidation of Alert positions but by fractional reduction in exposures where warranted.
What should YOU do now?
If you are concerned about your investments’ performance, or you are unhappy with the low level of service you’re receiving elsewhere, right now is a good time for you to make that change.
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