Broker Check

November 2, 2015- Market Rebound and What it Means

| November 02, 2015
Facing down another government shutdown, the House and Senate passed a new budget deal last week that suspends the debt limit until 2017 and increases funding levels for a number of federal programs. President Obama is expected to sign the deal into law early this week.[1]
The S&P 500 has closed above its 200 day moving average for the month of October after being below for August and September.  Typically it has been a negative environment for stocks when the S&P 500 trended below its 200 day moving average. Conversely, it has been a generally positive climate for stocks in the past when the index is above the 200 day. While this is not a bulletproof indicator as you can see below it has been fairly consistent at keeping you out of big trouble in dramatic market declines.  Unfortunately, there is the occasional head-fake or whipsaw and one never knows how they play out until afterwards.  Today, it appears the downturn was brief and that the market would like to get on with its long sideways move for the year. 
Part of our process looks at this indicator and as such we have put some cash to work in some well known blue chip names and are prepared to add more at the appropriate time. From peak to trough the market saw a decline of around 13%.  We sidestepped a portion of this volatility but not all. From a fundamental perspective there are still risks in the market. However, one can't ignore the market will do what it wants when it wants in spite of fundamentals.  Markets like liquidity and it appears Central Bankers across the globe have united to prop up their markets and economies.  
As we discussed last week all crashes start with corrections but not all corrections become crashes.  We have a long term view but we also want to try and avoid the crashes which is what most of our clients want us to do.  
We use 3 main indicators which are comprised of various small parts.  First, as mentioned above, we look at the moving average of the broad market to determine which overall direction stocks are moving. Also as mentioned above this can give the occasional head-fake.  Second, we look at the stress in the credit markets as measured by the St. Louis Fed. Incidentally, this indicator started to show some caution signs back in September but has since calmed down a bit.  Finally, we look at a couple of gauge that measures optimism and the U.S. macro economy. Thus far, this gauge isn't as upbeat as it was but is still positive.  Positive is the key as sometimes the volatility of the data can move the gauges back and forth a bit.
As always, we will keep you up to date and informed.

Monday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Factory Orders
Wednesday: ADP Employment Report, International Trade, Fed Chair Press Conference 10:00 AM ET, ISM Non-Mfg. Index, EIA Petroleum Status Report
Thursday: Jobless Claims, Productivity and Costs
Friday: Employment Situation


Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


Q3 GDP shows slow growth. Our first look at third-quarter economic growth showed that Gross Domestic Product grew a paltry 1.5%. This is just a preliminary report, and economists will revise the data several more times; however, we can see that weak business spending affected growth last quarter.[4]

Consumer spending misses in September. Personal spending data showed that Americans increased their spending at the slowest rate since January, indicating they may be cautious about economic turmoil.[5]

Consumer confidence rebounds in October. After a weak September reading, consumer confidence jumped in October as lower-income households grew more optimistic. Wealthier households were less confident due to concerns about financial markets.[6]

Pending home sales drop in September. The number of contracts on previously owned homes fell unexpectedly in September in a potential warning sign about the housing market.[7]


"I skate to where the puck is going to be, not where it has been." 
- Wayne Gretzky

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