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