IS LAST WEEK SIGNIFICANT? - Weekly Blog # 588

Mike Lipper’s Monday Morning Musings

IS LAST WEEK SIGNIFICANT?

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –

There were some clues this week as to the possible future direction of the US stock market and the likely leadership for various future periods. Both the S&P 500 and the NASDAQ Composite had their single worst week of the year. I view the performance of the NASDAQ as a better predictor than either the S&P 500 or the Dow Jones Industrial Average (DJIA). The gains from the common low point of the year on January 3rd through this past Friday were: NASDAQ +23.83%, S&P 500 +19.78%, and the DJIA +16.74%. This order might be representative of the level of speculation, or at the very least the reverse order of dividend yields.

It may also be instructive to look at the number of new highs and lows for the week. The New York Stock Exchange registered 603 new highs and 250 new lows vs. the NASDAQ’s 322 new highs and 337 new lows. From this data one might conclude that this week’s decline was more a function of correcting from recent enthusiastic gains rather than representing a fundamental change in direction or future leadership.

Possible Causes for The Decline?
On July 31st the Fed’s announced that it was dropping interest rates by 25 basis points. The market was up after the announcement but turned lower during and after the news conference and then fell for the next two days. The NASDAQ had a ratio of losers to gainers of 1.91/0.73. Why? The following list might suggest some reasons:

1. Buy on the rumor and sell on the news is normal.
2. Disappointment that further interest rate declines were not identified as likely.
3. Because of the growing number of consumer and commercial credit extensions, rates should be rising to discipline the market.
4. China’s leadership is in no hurry to address trade tensions while increasing control over all elements of its society.
5. Disappointment with the two Democratic candidate television debates.

The first possible cause is a normal trading reaction. The second is mainly a concern for rate changes during the next 12 months. The third is a concern as to the depth of the next recession. The fourth and fifth causes might impact not only the next presidential election, but also the conditions during the next presidential term.

If only one of the five is important a single portfolio structure can be created. If more than one is important, it reinforces the need to subdivide one’s assets and liabilities into separate timespan portfolios, which we can help construct. For example, if one looks at various slices of the S&P 500 for the last month, the order of the four best performing slices were: S&P 500 Enhanced Value, Value, Growth and Quality. (We have maintained that value-oriented portfolios might perform relatively well coming out of the next recession. In anticipation of this, at least one manager we follow used the brutal decline in the fourth quarter of 2018 to buy some bargains and then used the first quarter of 2019 to lighten up on extended growth companies.) If one wishes to look for possible dramatic turnarounds, the worst mutual fund investment objectives this year through Thursday were the international value fund categories. They have generated average gains between 5% and 7% vs. gains between 23% and 28% for domestic growth oriented funds.

Not Market Timing
Market timing is a process that requires making three decision in a row. The first is to sell. The second is where to place the money in reserve, and the third is the new buy. The odds of making three correct decisions in a row is very difficult and only a few investors can achieve it. The biggest mistake is often made with the reserve element, as cash usually becomes too comfortable and delays re-engagement with risk. The third, which is the most difficult, is to choose something sufficiently different from the investment that was sold.

Further, market timers tend to move the whole portfolio all at once. I suggest a gradual approach, which allows for confirming that the basic view has not changed over time. One of the advantages of using mutual funds as your preferred vehicle is that it allows you to focus on changing investment characteristics, something the funds themselves are generally not set up to do. You are taking advantage of their selection skills in rapidly building a sound portfolio.

Is the Past Week Significant?
I suspect it is an appropriate time to start to move the portion of your portfolio designed to make payments over the next five years or so. For longer-term portfolios this may not be the time to make moves, particularly for those investors that have at least ten years before needing to make payments. One should definitely be judicious in making changes in legacy portfolios.

   
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/07/chinese-emperors-learn-all-roads-lead.html

https://mikelipper.blogspot.com/2019/07/us-stock-markets-new-highs-misleading.html

https://mikelipper.blogspot.com/2019/07/twin-problems-not-enough-greed-and-too.html



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