Published March 30, 2018
Stock markets move up and down as information and emotion is reflected in the prices of company shares. Here at TimingCube we seek to use this up and down movement of the stock market to generate exceptional returns while protecting against significant downside risk. How much do stocks move? This chart from JP Morgan shows that stocks regularly experience a -10% decline at some point during the year. (The red dots show the intra-year decline while the bars show the annual return.)
2018 has already experienced a -10% decline; in fact, it was the swiftest drop on record. A market “correction” is typically defined as a -10% drop in stock prices. These corrections come as investors become concerned about some possible disruption to the economy. This newfound fear pushes stock prices down until the market emotionally absorbs it as described below. Note that this post is from Urban Carmel’s February 2016 blog and presents a good description of how the stock market makes its way through a correction.
One of the points to note here is that neither of these concerns from two years ago grew. Both the China concern and the energy downturn resolved themselves in a positive fashion, which most of the market’s fears do – they amount to relatively little to really worry about.
And so it appears to be right now as the stock market corrects for the first time since that early 2016 period described above. This time there are a range of concerns over which the market is fretting – rising interest rates, trade friction, stock valuation, etc. However, most of these items are fairly well-understood at this point. The counter-argument at this point comes from soaring corporate profits and a global economy that appears to be recovering in concert, which is rare. It will be interesting to see if the coming earnings season beginning in a couple of weeks breaks stocks out of their corrective phase or not.
After heavy losses last week, stocks looked to bounce back. Monday’s trade brought a solid effort with indexes recovering almost half of the prior week’s slide. The S&P 500 rose +2.7% following a report that China and the U.S. are engaged in initial negotiations to address some of the trade issues that have rattled stocks in recent weeks. But the gains were short-lived as Tuesday’s trade brought an ugly reversal. Stocks gave back -1.7% as tech leader Nvidia (NVDA) tumbled almost -8% on reports the company is suspending self-driving car tests while it investigates the cause of a recent fatal pedestrian crash. Tech stocks fell broadly in Tuesday’s session. Tech stocks continued their selloff Wednesday with Amazon (AMZN) joining the downside party. A report saying that President Trump was eyeing proposals to impose stricter tax rules on the consumer company was listed as a cause for the selling. The Nasdaq slipped an additional -0.8% on the day. The final trading session of a difficult month came in positive Thursday with indexes rebounding +1.4% as buyers stepped in to scoop up beaten down tech stocks, in particular. Large-cap indexes posted their second straight down month but held above their 200-day moving average. Markets are closed Friday.
A holiday-shortened and very volatile week for stocks managed to close with shares higher by +1.98% for the S&P 500 (SPY), +1.02% for the Nasdaq 100 (QQQ), and +1.19% for the small-cap Russell 2000 (IWM).
Warm wishes and until next week.