STA Weekly Report – What Goes Up Must Come Down
INSIDE THIS EDITION:
What Goes Up Must Come Down
Weekly Technical Comment
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When investors read the financial press they are bombarded with historical data that can be compared to what is occurring at the present time. Take for example a chart published in 2016 by Business Insider from Citi. It showed the S&P 500 in October 2016 overlaid with the S&P 500 heading into October of 1987. Taken at face value an investor may have expected the stock market to crash like it did in 1987. However, the reality was far more benign as the equity market continued its upward trajectory through 2017 and into 2018.
This illustration leads us an important takeaway – not all data or information is valuable for making investment decisions. Thus, it is imperative to have a discipline and framework with which to filter the valuable from not so valuable information. Without it an investor won’t know where to focus.
Investor sentiment and behavior is one of the most important pieces of information that can be utilized by investors as it drives expectations and asset prices. Along the same line, it is equally important to understand that markets often experience inflection points that can change investor sentiment and cause asset price trends to quickly shift. It is why when investors attempt to manage risk in a portfolio, they should try to remember that what goes up must come down.
Recently, we have seen a number of shifts that serve as good examples of this concept in practice.
High Flying Tech Stocks Change Direction
Over the last week, we have seen the S&P 500 information technology index quickly shift direction after leading the market for the first 9 months of the year. While it is possible that the recent technology sell-off is a pull back, it is equally possible that we are in the midst of a shift in sentiment that could mark the beginning of price erosion for the sector. As the chart below illustrates, October 3rd marked the intraday high for the technology sector and since then we have seen downward pressure on prices. This should not necessarily be any surprise to the well-informed investor, as earnings multiples in the sector were elevated going into the sell-off. Take for example, Amazon which as of October 9th, still sported a P/E ratio of 145x. As an aside, P/E multiples also come down from nose-bleed levels, eventually.
S&P 500 Information Technology Index Chart:
Earnings Growth Slowing
It is by no means a stretch when we say that the domestic earnings picture has been robust over the last 18 months. Of course, a massive tax cut has helped corporations cut their share count, thus boosting per share earnings, as corporate boards have announced a record amount of stock buybacks. However, just like technology stock performance may be in the process of reversing, and P/E multiples can mean-revert to more reasonable levels, earnings growth can reverse.
Just take a look at the chart below which illustrates a shift in sentiment inside of company boardrooms as companies across sectors of the economy have increasingly issued negative earnings guidance for the third quarter in yet another example of what goes up (in this case earnings growth), eventually reverses course and comes down.
It isn’t only equity markets…the economy mean-reverts as well
Let’s take for example, Purchasing Managers’ Indexes (PMI). These are well known economic indicators recorded on a monthly basis using survey data collected from private sector companies. After seeing improvement for years following the financial crisis and unpresented monetary stimulus across the globe, PMI’s have also downshifted. While still largely indicating expansion, outside of the U.S. PMI’s are gradually seeing a convergence toward contractionary levels (when the reading is below 50) in yet another reminder that what goes up must come down.
As these examples illustrate, it is often a good idea to begin de-risking a portfolio as data indicate being extended from either a price level or growth perspective. How this is done will largely depend on an investor’s philosophy and risk tolerance. However, it is key to have a game plan if things do start to show signs of inflecting. Portfolio changes should also be made before the inflection point has passed. This is how investors can hold on to gains made. More importantly, this will also ensure investors have capital available to deploy the next time things look more attractive.
Speaking of which, mean-reversion can often be a place to find attractive investment opportunities. Just like things can come down after being up for some time, things that have been down are also likely to see a recovery. As a result, it is typically a good idea to look at the most hated sectors or asset classes as any improvement in sentiment when things look bleak, can offer attractive returns. Of course, sometimes things are hated for a reason, but oftentimes things are cyclical and will see a brighter day ahead.
The NASDAQ 100 (QQQ) Leads The Market Lower
Stock indexes are all under selling pressure again this morning. As has been the case of late, the technology-dominated Nasdaq market has been leading the rest of the market lower.
Chart 1 shows the Invesco Nasdaq 100 QQQ Trust falling to the lowest level in more than two months. And its recent drop has come in heavier trading. That can be seen by the large red volume bars at the bottom of the chart. One encouraging sign is that its 9-day RSI line (top box) has entered oversold territory below 30. The QQQ is being pulled lower by technology stocks which are this morning’s weakest sector. Chart 2 shows the Technology Sector SPDR (XLK) looking pretty much like the QQQ in Chart 1. Recent loss of tech leadership can be seen by the XLK/SPX ratio (top box in Chart 2) which is already threatening its summer low. Semiconductor stocks continue to lead the tech sector lower.
Semiconductor ETF Falls to Six Month Low
Semiconductors have been the weakest part of the technology sector this month. Chart 3 shows the PHLX Semiconductor iShares (SOXX) falling today to the lowest level in six months. The SOXX fell below its 200-day average last Friday. Semiconductors account for 18% of the XLK and carry a lot of influence in the tech sector. This week’s chart breakdown isn’t a good sign for either one. The real test of the long-term uptrend in the chip group will be their ability to stay above their lows formed during the first half of the year. They appear headed toward a test of those previous lows.
Small and MidCap Indexes Trade Below 200-Day Averages
Small caps have led large cap stocks lower this month, and are undergoing an important test of their own. Chart 4 show the Russell 2000 Small Cap Index trading below its 200-day average. That’s a very important test for it and rest of the market. The RUT slipped below its 200-day line a couple of times during February and early April on an intraday basis. In both previous instances, however, it managed to stay above the red line on a closing basis. Since falling small cap stocks usually act as a drag on large caps, this carries important implications for larger stocks as well. Chart 5 shows the S&P 400 Mid Cap Index ($MID) also trading below its 200-day average. That’s putting more downside pressure on large cap stocks.
S&P 500 Falls Below It’s 50-Day Line
When smaller stocks fall, larger stocks usually follow. And that’s what is happening. Chart 6 shows the S&P 500 Large Cap Index falling below its 50-day average today for the first time in four months. It is also trading back below its January intra-day peak at 2872. The next test of potential support should be its 100-day moving average (green line) which hasn’t been broken in six months. Most stock sectors are deeply in the red today. Defensive consumer staples and utilities are attracting safe haven money. There appears little doubt that the recent upside breakout in bond yields is causing investors to rethink their allocations to riskier parts of the stock market. And maybe even to the stock market itself.
Weekly Snapshot of Global Asset Class Performance
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STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Mike Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)
What is the Medicare open enrollment period?
The Medicare open enrollment period is the time during which people with Medicare can make new choices and pick plans that work best for them. Each year, Medicare plans typically change what they cost and cover. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.
When does the open enrollment period start?
The Medicare open enrollment period begins on October 15 and runs through December 7. Any changes made during open enrollment are effective as of January 1, 2019.
During the open enrollment period, you can:
- Join a Medicare Prescription Drug (Part D) Plan
- Switch from one Part D plan to another Part D plan
- Drop your Part D coverage altogether
- Switch from Original Medicare to a Medicare Advantage Plan
- Switch from a Medicare Advantage Plan to Original Medicare
- Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
- Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn’t offer prescription drug coverage
- Switch from a Medicare Advantage Plan that doesn’t offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage
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