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STA Weekly Report – Don’t Drop the Ball…It May Bounce

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INSIDE THIS EDITION:
Don’t Drop The Ball…It May Bounce
U.S. Stock Indexes Have January Rebound
Stock Indexes Approach Overhead Resistance Barriers
Other Signs of Short-Term Improvement
Weekly Snapshot of Global Asset Class Performance
401k Plan Manager  *Updated on 12/31/2018

Back in early October, we wrote a piece titled What Goes Up Must Come Down. The message from that article was clear – when asset prices increase too much too soon, they become prone to reversals which make investors susceptible to losses.

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As we mentioned then, these reversals are not limited to asset prices. In fact, everything from major market indices, earnings growth, and economic data are vulnerable to correction when the trajectory is overly bullish, and optimism reaches levels of excess. Fast forward only a few weeks from the release of that article, and it became clear that investors were in a vastly different market environment. Suddenly the market was marked by higher volatility and pessimism, as investors endured a market drawdown of a magnitude not seen in years.

The good news is that the same type of phenomenon also occurs on the other side — What goes down sharply, can, and often does bounce, at least temporarily.

Small Cap Stocks

Take the move that we have recently seen in small cap stocks. After a dismal 2018, small cap stocks started the year taking off like a rocket. In fact, the Russell 2000, started the first four days of the year by posting a year-to-date return of greater than 4%. Even European small caps got in on the act as the MSCI Europe Small EUR Net Total Return Index returned 3% for 2019 through the end of trading Monday.

Source: Bloomberg

Not bad considering the dismal returns small cap stocks experienced in 2018. As the chart below shows, the Russell 2000 ended December down more than 22% from the peak. That small caps have caught a bid to start the year, is encouraging but truthfully has not developed into a longer-term trend just yet. It will require a bit more time to see whether positive momentum in small caps remains with us. 

Source: STA Wealth Management

However, the lesson this example provides is that investors should be less concerned about what has done well in the past and instead should focus on what is primed to do well going forward. Pretty easy to say, but unfortunately, very difficult to do because of human biases and our inherent fight or flight response to things that we perceive as threatening. And the truth is, there is nothing that feels more threatening to an investor than deploying capital to an asset that has shown recent underperformance.

Unfortunately, 2018 was a year when most asset classes finished the year posting a negative return. That means that when it comes time to redeploy capital, it is likely to feel somewhat uncomfortable.

So what is an investor to do to keep them from sitting out too long once things settle down and turn more positive?

Source: Novel Investor

There really is no perfect answer. However, what we have found is that a technical discipline laid on top of a macroeconomic and fundamental analysis framework can be extremely helpful.

Part of what we do is use short-term exponential moving averages to help neutralize emotion from the risking/de-risking decision. For example, as 20-day exponential moving averages cross below the 50-day exponential moving averages on certain broad market indices, it is a sign to us to reduce exposure. This can be seen in the chart of the MSCI Emerging Markets Index below. The sell signal (red circle) sent us a signal to reduce exposure to emerging markets relatively early in 2018. While we did not reduce exposure at the very peak, it did help us reduce the impact of the steep decline that occurred in Emerging Markets from April until the end of the year.

Exponential Moving Average Chart – 20/50 days:

Similarly, as the 20-day exponential moving average crosses above the 50-day exponential moving average, it is a signal to redeploy capital to this geography to take advantage of an improving price momentum environment.

While the discipline won’t necessarily get us back in at the very bottom, it should allow us to participate in a major portion of any recovery. Again, it simply provides a tool we can objectively rely on to make capital allocation timing decisions at times when decision-making may otherwise be impaired by emotion.

U.S. Stock Indexes Have January Rebound

Stock prices are trending higher again this morning which continues the rebound that started right after Christmas.

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The charts reflect that short-term improvement, while keeping them in a longer-range perspective. The main point of the charts is that all three U.S. stock indexes remain in downtrends as measured by falling moving averages and overhead chart resistance formed during the fourth quarter of last year. The big test will be whether or not prices are able to overcome some of those overhead barriers.  

Stock Indexes Approach Overhead Resistance Barriers
Chart 1, for example, shows the Dow Industrials moving above its 20-day average (green line). But it remains well below more important 50- and 200-day averages (blue and red lines). The Dow is also nearing potential overhead resistance near its early December intra-day low (23,900) and its late October low (24,100). Chart 2 puts those two overhead resistance barriers for the S&P 500 at 2583 and 2603. For the Nasdaq Composite, those two numbers translate to 6878 and 6922. Trading volume has been relatively light which detracts from those recent price gains. 

Other Signs of Short-Term Improvement

Other short-term positive signs include rebounds in economically-sensitive sectors like consumer discretionary stocks and transports, while defensive stock sectors like consumer staples and utilities have lagged behind. Small caps are also doing a little better than large caps over the past week. Bond yields are also bouncing which has caused profit-taking in Treasury bonds. But corporate bond prices are rebounding, especially riskier high-yield bonds. That’s usually a sign of renewed confidence. A pullback in the dollar is also helping lift crude oil and some other commodity prices. All of those improving trends, however, are short-term in nature and not enough to reverse technical damage done to the various markets since the start of the fourth quarter. We will, however, be watching those short-term trends very carefully in the days ahead to see if they can turn into something more lasting. Longer-range technical trends aren’t very encouraging. But we’ll be looking for any signs of those negative trends changing in the new year. One of the first signs will be how stocks do during the month of January.

Weekly Snapshot of Global Asset Class Performance

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

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)

New Year’s Resolutions – Get Your Finances in Order
Written by: Scott Bishop, MBA, CPA/PFS, CFP®

Many of you made new year’s resolutions to eat healthier, lose weight and be better to your family.  For those of you reading this newsletter, I bet you at least thought about making some Financial “New Year’s Resolutions”.  Your friends at STA Wealth want to help you reach your financial resolutions and goals.  I was just interviewed by Cameron Huddleston at Go Banking Rate for some New Years Resolution’s that you can consider…at no cost!

On the STA Money Hour, daily at 12pm on 950AM KPRC in Houston, we have talked several times about how to better plan for your future.  As we enter the New Year, it is a great time to get organized to start next year on the right foot with the right plan!  Below, I have listed some steps that you can take to get your finances ready by year-end.

First off, read this linked article to see if you are on track given your sage in life:   Proper Planning to Avoid Money Worries.  Then take a look at our year-end financial planning ideas to see if there are any you should consider.  Once you read these articles, here are some follow-up steps to help your New Year’s Resolutions become reality!

Read the Full Article Here

Important Disclosure

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.

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