Uncategorized, Weekly Update

The Bear Awakens and TimingCube Responds Well

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Published February 9, 2018


After two years of nearly non-stop gains punctuated by a vertical ascent to kick off 2018, the stock market finally ran out of gas this week. Those two years brought investors a +60% return in the S&P 500 and a +75% rise in our focus Nasdaq 100 (QQQ) index. This rally was of historic length and ease, with volatility dormant. This week, the bears got their long-awaited time to shine. Not one but two days of 1000 point plunges in the Dow Jones Industrial Average – each a record for raw point declines in the index. Monday afternoon through Tuesday morning saw volatility unleashed in a fury never seen before; the evaporation of one or more volatility-based securities causing a run on the volatility futures market. That run sent the spot price of the volatility index up almost three fold in a mere four-and-a-half hours of trading – an astonishing move. Kickstarting this market about-face was an employment report noting that wages were rising solidly for the first time in a decade. Rather than cheer this most welcome development (at least for those receiving the raises), the market decided that a new fear had ridden into town: inflation. Higher inflation means higher interest rates which means that the era of easy money is over. Stock prices are in the process of being readjusted for this new expectation.

Outside of a market that had long become overheated, nothing is all that new here though. The Federal Reserve was always expected to raise interest rates pretty handily in 2018 as the global economy roars ahead. In January the market looked only at the positive side of that strong global economy – e.g. great corporate earnings fueling higher stock valuations. Thus far in February, it’s been the complete opposite – angst over how the powerhouse economy will itself overheat bringing higher inflation and higher rates.

How long does this market heartburn last? This data from Goldman Sachs by way of CNBC offers some historical averages. If the market’s decline is halted at some point LESS than -20%, we have a typical market correction. A drop of more than -20% and we are in bear market territory. A correction gives us -13% on average over four months with another four months bringing a full recovery in price. A bear market is typically, but not always, a much longer proposition.

S&P 500 since WWII

As with most averages, there is a good amount of dispersion around that average. This table shows that corrections occurring in strong “secular” bull markets, such as in the 1990s, are very quick.

S&P 500 corrections and bear markets since WWI

S&P 500 corrections and bear markets since WWI

Source: Goldman Sachs

The current correction has occurred like a tidal wave, wiping out January’s heady gains in little more than one week. No question the market was well overdue for some digestion of its winning streak, a chance to rest and take pause. No question complacency had seeped into every corner. The violence of this week’s market has abruptly reminded investors that the market is not always so friendly. We are reminded that having a strategy like ours, with the flexibility to respond to the market, both up AND down, offers not only wonderful protection of our profits, but a chance to add to those profits while the market drops. This week, we were thankful for just how beneficial that approach can be.

Market Update

The stock market came unglued this week with a “black swan” spike in volatility providing a backdrop to not one but two record-setting declines in the Dow Jones Industrial Average. Following Friday’s sharp selloff in stocks investors hoped for a rebound coming into Monday’s trade. It wasn’t to be. Declining from the opening bell, stocks panicked in the afternoon pushing the Dow Industrials lower by over -6% (a near 1600 point slide). Volatility shot higher in the final hour of trade as a couple of VIX-focused ETFs failed leading to a huge wave of protection buying in the form of VIX call options (which go higher as fear in the market rises). The panic beget more panic before the market settled at a -4% dump on the day. When the market is panicking the fundamentals go out the window. It becomes all about technical trading. Tuesday’s technical trading was a 1.7% bounce after two days of harsh selling. The one major fundamental item of the week, a budget resolution in Congress, supported the shares of Dow favorite Boeing (BA) Wednesday as an increase in defense spending looked certain. A choppy session landed on a modest -0.5% result. That was simply a pause before another storm, however, as stocks sold off hard once again in Thursday’s trade. No new information other than selling producing more selling, this time en route to a -3.8% slump. Friday opened higher only to see sellers overwhelm the trading once again. Indexes were driven to their widely watched 200-day moving average where programs kicked in to aggressively buy stocks. The buying reversed stocks from a -1.5% loss at mid-day to a +1.5% gain at the close.

Investors continued fleeing stocks this week sending the S&P 500 (SPY) down -4.98%. The Nasdaq 100 (QQQ) cratered -5.17%. The small-cap Russell 2000 (IWM) dropped -4.58%.

Warm wishes and until next week.