Stock Market Risk Increases

Sep 13, 2016

Stock Market Risk Increases

 

Market Update

In our July 18th newsletter and those that followed, I talked about how market internals were warning us that stocks were susceptible to a short-term pullback.

July 18, 2016 Newsletter:

“Many indicators are suggesting this stock market advance is likely to continue. However, near term, the current extreme in investor complacency/fearlessness that emerged last week plus July seasonality warn that the sharp rally off the Brexit lows is unlikely to continue much further, if at all, without at least a minor pullback first – which I believe will occur between now and month end.”

“Longer-term stock market conditions look positive; however, we could see some short-term market weakness before stocks resume trending up.”

As I mentioned in the newsletters that followed, market internals were warning of a pullback, however we had not gotten confirmation that would show up in price action, momentum indicators, and the VIX. While it took longer than expected, on Friday we got confirmation in all three.

Let’s look at all three. First price action. Stocks did bounce today and recouped about 60% of Friday’s losses, but that does not negate the negative short-term internals that have progressively deteriorated over the past couple of months.

Below is a 2-hour chart of the S&P 500. As you can see, stocks had been churning sideways (consolidating) since mid-July; however, on Friday prices fell below support on very high volume.

spx-1hour

Momentum indicators have deteriorated over the past few weeks and now have all turned negative. Below is a chart of the 21-Day Rate-Of-Change indicator and it dropped below zero on Friday.

roc

The VIX had been warning that investors were overly complacent and the market was susceptible to a short-term correction. On Friday the VIX shot up strongly above its 50-Day Moving Average. A sign that volatility has risen and fear has increased.

vix

Since longer term internals are suggesting that this correction should be minor, the logical areas that it could bottom would be at support, which I have notated with horizontal lines in the chart below.

If this is just a short-term correction in a longer term uptrend, I would expect the S&P 500 to not drop below about the 2050 area. That would equate to about a 6.5% drop from the recent high. If it did fall below that level, that would mean that it fell through several layers of support, including the 200-day moving average. In addition, it would have retraced more than 62% of the previous uptrend, which is an important Fibonacci Retracement level. I don’t expect this to happen, but if it did it would put in question the longer term strength of the stock market.

spx-daily

The Bottom Line

Substantial changes have been made this week to our stock market bias relative to the past couple of months due to a deterioration in short-term stock market internals.

Bias: Neutral (Short-term negative, long-term positive for stocks.)

  • Long-term stock market price action is positive and will remain so as long as prices remain above the June 2016 lows.
  • Market internals suggest a positive environment for stocks over the longer term.
  • The short-term market weakness that was signaled by market internals as far back as mid-July has been confirmed. The market is now in the process of correcting.

Client Update

Client accounts are between 80% to 100% invested in lower volatility funds.

We will be looking to add funds that we have identified as providing attractive risk-adjusted return characteristics once short-term internals turn positive.

For the most part, our accounts have trended up with very minor volatility this year.


Do You Have Concerns About Your Retirement Account Allocations?

  • Are you invested in a manner that will allow your retirement assets to appreciate over time, but without the risk of major losses that typically occur as a result of major stock market corrections (much like what occurred in 2002 and 2008)?
  • Investors are in the midst of a bond bubble. Yields have fallen for over thirty years and are at historically low levels. Once they rise (and they will eventually), bonds prices will fall – perhaps substantially. Is your bond portfolio protected against this type of risk?

If you have questions/concerns about your investments or just want us to review your accounts – we can help!

Reply to this email to schedule a portfolio review. We can review your allocation and determine if you are invested in a manner that is appropriate given your situation.  

 


Craig Image_wires_skin40_level_grey_160pix

Craig Thompson, ChFC

https://assetsolutions.info/

Email: [email protected]

Phone: 619-709-0066

About Asset Solutions

Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.

We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.


Asset Solutions is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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