Stock Market Update 10-3-16

Oct 4, 2016

Stock Market Update 10-3-16

Market Update

Since mid-July I have been writing about how market internals are suggesting that stocks are looking weak over the near-term. However, over the longer-term they still look strong. Since then, stocks have churned sideways. The month of September ended with stocks basically flat for the month.

Nothing has changed this past week, in that market internals are still suggesting short-term market weakness. Below is a chart of the S&P 500, with blue horizontal lines placed at support. We look at these areas as likely places for the market to bottom. Currently the S&P 500 is sitting above the first level of support. Unless internals improve, the index is likely to retest the lows of last month.

spx-daily

One of the more important charts to look at when determining stock market risk is market breadth. Declining market breadth suggests increasing stock market risk and elevated odds of short-term stock market weakness.

Normally I show the NYSE Summation Index to illustrate market breadth, but today I am looking at the NASDAQ Summation Index. As you will notice in the chart below, the Summation Index (top panel) has been declining for the past couple of months. Until this index changes course and trends up, the odds of further stock market weakness are elevated.

nasdaqsummation

Over the past year, when the VIX (top panel below) drops below about 13, the stock market has pulled back to some degree. Last week the VIX dropped to about 12 and today closed at 13.57. These low VIX readings are suggesting that investors are overly complacent and thus the odds of a stock market pullback are elevated.

vix

If we drill down and look at that same VIX chart (upper panel below) over a shorter time period, you will notice that day-to-day lows in the VIX are slowly rising. This means that investors are slowly becoming more fearful after being overly complacent and thus the risk of a sharp advance in the VIX is becoming more likely. Any strong advance in the VIX is usually accompanied by a strong drop in stocks.

vix2

The Bottom Line

Short-term stock market risk is currently high. Odds are elevated that stocks will fall or continue to churn sideways over the near-term.

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. Short-term market risk is high.

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.


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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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