The Northern Star 10/29/18 Why Did Stocks Drop?

Message from Jon

Market Update:

This market has been anything but fun over the past 3 weeks. According to Jim Tissoni, the DOW dropped 6.7%, NASDAQ fell 10.9%, and the S&P 500 declined 8.8%, but the biggest loser was the Russell 2000 loosing 12.5%! 1What kinda month am I having..."frustrating" would be a good word here.

Listen, if you have followed ANY of the numerous newsletters I have released in the past year or so, you should know that this market was overcooked and at levels that defied common sense. That being said, it was not easy to see the declines in assets and not want to run for the hills with any profits we have left. Risk is risk, and it is either working in your favor, or it is working against you. The transition is rapid and rough.

In one week's time, Stormguard shifted from -0.10 on Friday the 19th to -0.87 as of last Friday! 2 D/W is still favoring domestic and international equities, but even those have fallen in strength, and of the 18 charts that we watch, 16 of those are demonstrating a "Bear Confirmed" signal at the moment.3

COULD the market rebound? sure it could. With 2 months remaining and a historically strong 2 months in the market, sure. Will it? ...that I am not sure of. The odds are that if it does, it may be 5-7, maybe 10% upward followed by more, MUCH more downside.4,5 These past couple weeks, I have made numerous changes to our accounts to protect principal and stay within those positions that are still showing a bullish trend while eliminating those with bearish trends surfacing.

This raises cash levels in accounts and also reduces further risks to principal. One more thing: selling those holdings that reverse in their trend confirms that any rebound or rally they may demonstrate happens without us. With mixed signals, the best thing is to be patient. We rebalance our holdings, realign our portfolios, but not remove all the capital. "Well, if you're so confident, why not all or nothing?" The market doesn't go straight up, just like it doesn't go straight down, so we have to behave in a complementary manner that reflects the market conditions and probabilities for success.

At this moment, the highest probability of success is to evaluate, realign, and wait-so that is what we do. We might add some hedge in here and there as a boost to some accounts, but overall...we exercise patience, as hard as that might be at the moment to actually do!

Till we speak again, enjoy your week!

Jon 

Sources:

1. http://durandcapital.com/market-recap/
2. http://alphadroid.com/MyPages/StrategiesAG2.aspx 
3. https://oxlive.dorseywright.com/dashboard/8934 
4. https://www.marketwatch.com/story/the-wall-street-analyst-who-called-this-stock-market-rout-sees-another-nasty-drop-for-the-sp-500-2018-10-25
5. https://www.marketwatch.com/story/stocks-could-rally-20-after-this-bruising-rout-says-guggenheims-minerd-but-then-watch-out-2018-10-26

WEEKLY UPDATE - OCTOBER 29, 2018 Last week did nothing to dispel October's reputation as a tough month for the markets. The S&P 500 lost 3.94%, the Dow declined 2.97%, and the NASDAQ dropped 3.78% during what was one of 2018's most volatile weeks so far. All three indexes are down significantly for the month, and both the S&P 500 and Dow have entered negative territory for 2018.[1]International stocks in the MSCI EAFE also struggled, posting a 3.87% drop for the week, and a 13.31% decline for the year.[2] Why did stocks drop? Will they continue to do so? Currently, many topics are on investors' minds, from inflation to tariffs to valuations and beyond, but analysts are not pointing to one single culprit for last week's performance. Instead, a mixture of concerns, with a large dose of emotion, seemed to drive the markets.[3] Emotional reactions are understandable when volatility emerges, but they have no place in long-term investment strategies. Instead, we need to focus on the fundamentals. What did we learn last week? Trying to find simple explanations for market behavior can feel impossible, in part because the markets aren't a machine - they're a reflection of many human actions. Investors make choices based on their interpretations of current conditions, and the effects of these decisions become "market performance." Amidst the volatility, we received several updates on the economy, including: 3rd Quarter Gross Domestic Product (GDP) beat expectations: The initial GDP reading for the 3rd quarter came in at a strong 3.5%, helped in large part by consumer spending.[4] Corporate earnings have been strong, but imperfect: So far, this corporate earnings season is showing 22% growth, but fewer S&P 500 companies are exceeding analysts' predictions than in the 1st quarter of 2018. In particular, some major tech companies' results disappointed investors.[5] Housing continued to struggle: New home sales were lower than expected in September, which followed disappointing results from existing-home sales data, as well.[6] Inflation growth eased: The Personal Consumption Expenditures Price Index, which shows inflation, increased by 1.6% in the 3rd quarter, much lower than projected.[7] Examined together, this data indicates that while the economy has potential challenges, it also demonstrates solid growth, reasonable inflation, and strong corporate performance. That story feels different than the sharp drop we experienced last week. However, when you look at the bigger picture, our current circumstances provide another reminder that volatility is normal, and examining economic fundamentals is critical.   Still, risks exist, and in the coming weeks we will pay very close attention to data and performance. In particular, we will follow the Federal Reserve's comments and actions to see what may lie ahead for interest rates. In the meantime, please let us help answer your questions and address your concerns. We are here to help you pursue your goals, in every market environment.   ECONOMIC CALENDAR Monday: Personal Income and Outlays Tuesday: Consumer Confidence Wednesday: ADP Employment Report Thursday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending, Jobless Claims Friday: Employment Situation, Factory Orders Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Sources: [1] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI®ion=usa&culture=en-US http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO www.bloomberg.com/news/articles/2018-10-25/asia-stocks-set-to-rally-on-u-s-gains-bonds-slip-markets-wrap?srnd=markets-vp www.cnbc.com/2018/10/26/stock-market-us-futures-show-drop-for-dow.html [2] www.msci.com/end-of-day-data-search [3] https://www.bloomberg.com/news/articles/2018-10-25/sell-offs-are-normal-but-this-week-is-shocking-the-pros [4] http://wsj-us.econoday.com/byshoweventfull.asp?fid=485684&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top [5] www.reuters.com/article/us-usa-stocks-weekahead/mixed-u-s-inflation-signals-leave-investors-adrift-idUSKCN1N01F6 [6] wsj-us.econoday.com/byshoweventfull.asp?fid=485959&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top [7] www.cnbc.com/2018/10/26/first-read-on-us-q3-2018-gross-domestic-product.html