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The Northern Star 10/15/18 Interim Market Update: What's going on!

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Message from Jon

Interval Market Update:

These past couple of days have been quite a ride.  With all that has gone on, I thought it would be good to send out an interval update.

We have seen these past several days send the markets on a rapid slide down so keep this in mind, companies aren't laying off, banks aren't closing, economies aren't receding. This market could likely decline another 2-3 percent and still be healthy and normal. My guess would be that quite a few of you out there are wondering or questioning what action if any you should be taking with regard to your investments. "Is this the beginning of the BIG crash/correction we've heard so much about?" "ALL my gains are gone, and they probably won't be back any time soon..." "I should pull out now while I have anything left..."

Of course, the data we are following is showing signs of weakness when compared to 2 weeks ago, and that is no surprise. It is not, however, demonstrating anything beyond that at this point. We are not trying to avoid the raindrops in a thunderstorm or even the thunderstorm itself here, we are trying to avoid the hurricanes! 

I have attached an article from Yahoo Finance that demonstrates the biggest one-day drops in history of the DOW and I think you will find it interesting, especially when you look at the various dates. 1  

  

As you can see here, the biggest drops have all occurred in since 2000. Why? In our opinion, two reasons:

  1. The instant access to information and accounts by the general investing public 4
  2. The way that wall street is now traded 5 

Whenever you get an un-informed investor that is operating on emotion or a charged behavior from the last headline they've read accessing their accounts and reacting to what they read/hear or see...it's a disaster waiting to happen. 

With the advent of technology and algorithms that now effectively trade the markets in milliseconds, whenever we see the markets decline to certain areas of support, we actually see the speed of the market sell-off increase drastically. This is because at pre-arranged levels trades are already arranged to take place "protecting against larger losses" or "buying on the dips". When this is executed on a one-off basis, no worries. When this is done on an institutional scale, in large enough numbers, you get what we got yesterday and in other times it's like the above chart shows.

In my experience, whenever you experience a dramatic or drastic move, the best thing you can do is NOTHING. Sit on your hands and avoid the reactionary behaviors. Reminds me of whenever my kids would bust into the room frustrated by some event and spout off, which has been known to spark an ugly exchange, and then...they have to come back later and regretfully apologize, because after the emotion has subsided, they are now composed and see where their reaction to a situation was un-called for.

Let's face it, we have all done this a time or two in our histories. We can understand the destructive behavior, and experience has taught us that this kind of reactionary move is almost ALWAYS something you come to regret.

This is NOT the last time this will happen on wall street. When the real McCoy shows up, there will be data points present BEFORE the decline unfolds, but it will be quicker than '08 and catch a lot of investors off guard in my opinion.

As of last night, Stormguard receded from the 45 area to 39 while Dorsey/Wright still shows Domestic Equities with no change in the lead behind in International, Commodities, Bonds, Cash, and Currencies. 2,3 We are now seeing several of the various charts we follow also showing an oversold status, which is suggesting that we should be nearing the bottom of this decline, also implying a renewed interest in investment in the near term. 

Till we know more, we stay the course! 

Jon

Sources:

  1. https://finance.yahoo.com/news/biggest-one-day-point-drops-203000848.html
  2. http://alphadroid.com/MyPages/StrategiesAG2.aspx
  3. https://oxlive.dorseywright.com/?port_id=59231&page=1&sort=asc&sort_header=fund_score
  4. https://www.cnbc.com/2017/06/13/death-of-the-human-investor-just-10-percent-of-trading-is-regular-stock-picking-jpmorgan-estimates.html
  5. https://www.investopedia.com/financial-edge/0212/how-the-internet-has-changed-investing.aspx

Dorsey,Wright 

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