Was the first week of October the Bull Market?

 Introduction

When everything was falling in price in August, I suggested that one should start to place orders to buy some of the "falling knives" which had the biggest declines, around -20%. These items included commodities and commodity related investments as well as TIPS. My view was that off a bottom there is often roughly a ten percent "relief rally" and this was the easiest money to earn in a new bull market.

In the period from October 1 - 8 , 2015, the following six out of 96 equity oriented mutual fund classifications' investment objectives produced double digit returns:

Natural Resource funds	+ 14.34%
Precious Metals funds	+  13.58
Global Natural Resources funds	+  13.32
Equity Leverage funds	+  12.04
Energy MLP funds	+  11.18
Basic Materials funds	+  10.76

As we know the price of crude oil rose 9% during the week, but there was more to these gains than the oil price pop. While there was undoubtedly a rush to cover various short positions, there were some participants that were sensing the potential for future inflation. More will be needed for the investors in these funds to break even for the year. Even after the double digit gains for the week, five out of the six groups shown above were still down double digits. (Equity Leverage funds were down -9.72% for the year to date.)

Smaller gains were made in the week by 93 out of 96 investment objectives tracked by my old firm now part of ThomsonReuters. Only few of these were able to show gains for the year. These tended to be large growth funds often with meaningful positions in the much politically derided Health/Biotech group. At least Moody's is concerned that we have not seen the bottom of oil prices, they have lowered the credit ratings on five US regional banks which have substantial energy loans outstanding. Being a contrarian I would watch these for an entry point, as I am convinced that in time the underlying collateral will be good on balance.

Even though we are not traders (as we invest for lengthy periods) we need to be aware of others in the marketplace. The risk for the trader is that the double digit that some funds enjoyed fulfilled "the easy 10%" pop expected after the sharpness of the summer declines. Now the trading question becomes whether the August lows will need to be tested in order to put in the low for the year, if we are going to have a meaningful recovery before the US presidential election year.

We Don't Care

As long-term investors we are not very excited by this year's performance unless it has significance in terms of the implications of meeting our clients’ longer term payments needs of their distant beneficiaries. Why am I so relaxed at the moment? First, I believe last week's move was in recognition of some changing attitudes beyond the "oil patch." As is often is the case, I look to the fixed income world for guidance. Domestically, taxable bond fund classifications showed gains, albeit small. These for the most part were funds that trafficked in lower credit rated paper. For people to bid these up they could not be very concerned about a meaningful recession. The other message that I perceived was that the poorly performing TIPS funds gained while other US Government Bond funds showed minor losses.

Foreign Signals

Emerging Market Bond funds, in local currencies, produced the best returns among fixed income types by a wide margin last week, +4.44%; in contrast with Emerging Markets Debt hard currency issues +1.84%. Bond funds which invested in more developed countries gained +1.3%.  My interpretation of these results is, at least for the week, that market participants were suggesting the meteoritic rise in the dollar was at least peaking.

Volatility

The investing public that is glued to the media is fearful of triple digit price changes in the Dow Jones Industrial Average. Using the somewhat less volatile S&P 500 since 1928 according to Factset/StockCharts, the days with a 1% (Up or Down) occurs every four or five days. As a matter of fact I set my computer alerts to only inform me when prices move at least 2% and don't consider action below 3-5%. The New York  Federal Reserve Bank is somewhat addressing these concerns in the corporate bond market that has had bank trading capital reduced by 75%. They maintain that there is ample liquidity to absorb sudden shifts in prices. (Interestingly enough, they did not address what in theory is the deepest fixed income market in the world, the market for US Treasuries. Because of rapid global trading of these instruments through computer interfaces by non-bank dealers and investors, I am worried. During hectic periods of unwinding "carry trades" when treasuries are collateral for borrowings in more exotic paper, I am concerned by the chance for some indigestion.) 

Question of the Week: How are you addressing this market, did this week mean anything?

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