The Dow closed down over 600 points yesterday on news of Apple’s pre-announced revenue miss. Today, the market is up over 700 points. What’s the correct trend?
To me, the trend is lower, and today gives you an opportunity to unload some equities exposure. A few reasons why:
- The jobs report that was very good today is a lagging indicator. Jobs will often continue to power higher as we enter into a slowing growth scenario.
- There are going to be bounces as the market heads lower. Economic data has weakened and we’ve simply hit the end of a cycle. The market’s going lower. Selling the bounces is a way to reduce exposure.
There are no fool-proof indicators in investing, but I do monitor a few different ones. One indicator which I learned from Jim Otar in his excellent “Unveiling the Retirement Myth” book is the analysis based on the 5-month moving average and the 12-month moving average. It goes like this:
- Compare the 5-month and 12-month moving averages of the S&P 500.
- If the 5-month moving average is below the 12-month moving average AND the 12-month moving average is declining, then get defensive.
- Otherwise, stay aggressive.
I like this indicator because 1) it’s simple, 2) it’s based on monthly checks which means it’s not going to have you trading in an out every day and 3) it only has two states of aggressive and defensive. You can define what that means for you. Aggressive might mean 100% equities or 70% equities. Defensive might mean 100% cash or 30% equities / 70% bonds.
Interestingly, this indicator just flashed a sell signal. Also interesting is that it flashed sell signals prior to the major drops in 2000 and 2008. See below:
Is it perfect? No, but it’s one tools of many. I’m in the process of refining my overall model which will utilize 3-4 indicators. This will likely be one of them.
I think the market will hit newer lows in the first quarter of 2019.
As of now, I don’t think we hit a recession, and there are three catalysts that will make the market bottom and move higher later in the year:
- The end of the Fed’s rate hikes – If I had to guess, the Fed is done hiking. They will eventually make this clear to the market.
- A trade deal with China – This will remove the uncertainty involving trade.
- An infrastructure deal from Congress – The one area of cooperation between the Democrats, Republicans and President Trump, in my opinion, will be a bill on infrastructure spending.
Growth is indeed slowing and we’re at the end of a cycle. But, watch the above three items as I believe these items will help the market bottom at some point in 2019 and also help the economy avoid a recession.
For the near term, be cautious.