No doubt the past few weeks have been difficult days in the market. I thought it might be good for us to reiterate what has gone on, why Polaris Wealth has tried to be patient with this market, and what we expect to happen in the coming weeks in the market.
What Happened:
Going into earning seasons, the S&P 500 peaked on October 3rd at 2925. The prior six months had seen the S&P trend upwards, with higher lows and higher highs. This means the overall trend is up. When the market sells off, that sell-off is higher than the prior selloff. The markets then went up to a higher level than it had been earlier. The markets trickled down from their October 3rd high for about a week. This 1 ½% drop left the S&P at 28 80 on October 9th. It was a very normal pull back at that point, and the trend was still intact (above the previous lows of 2868 – the green line in the graph).
October 10th started the day weak, but only down 1 % early in the day. It hovered there most of the day, then plummeted 2% in the final hour of the trading day. This dragged the S&P 500 down 4. 79 % from its highs. Trying to avoid pullbacks under 5% is historically an impossible feat. This move got our attention, but we were not overly concerned.
We’ve had a few clients question why we haven’t been more aggressive about selling and getting more defensive. Had we known the markets were going to correct 9.13 %, where we are today, we would have taken some chips off the table. Obviously, we don’t have tomorrow’s newspaper, making this an impossible feat.
Let’s say that we did decide to get defensive after the big pull back on October 10th. Had we chosen to sell on October 11th (the blue arrow) we would have executed trades throughout the day. The average price that day was 2752 (the blue line in the graph). Had we chosen to get defensive at this point, there is a high likelihood we would have been questioned by many of you for the seven trading days that the S&P 500 was trading above that execution level. Selling on October 11th would have only helped us avoid 3.42% of the pullback (the yellow line). Even had we sold on October 11th, we’d have only sold 10-20 % of our portfolio. While it would have helped, it would not have protected you from much of the pullback.
At our current levels, we see limited downside risk, with a possibility of the markets retesting February/ April lows (the red arrow). This is less than 3% further downside. The last thing that we want to do now is sell. We want to buy low, sell high. Not the other way around. Selling into this market at this point would be getting out of the markets at precisely the wrong time. Let me show you some empirical evidence why.
Sentiment in the Market
The sentiment is at extreme lows. Over the past 25 years, when sentiment has reached this extreme level the S&P 500 has gone up
30.95% per annum (the chart below). I have marked the times that this has happened from 2009 to present (green arrows). Look at the
extreme point points in sentiment (the lower red lines) and the chart of the S&P 500 (the blue line in the upper half of the chart). As you
can see, when sentiment reaches this extreme (the blue arrow), the S&P 500 typically rebounded significantly off of its lows.
The Markets Are Oversold
If you look at the daily trading in the S&P 500 over the past year, both Relative Strength and Stochastic readings are both extremely oversold. I have marketed the chart below when this has happened over the past year. In each case, the markets trended up afterwards.
Looking at the S&P 500 trends weekly shows similar results. Over the past five years, the S&P 500 has reached these extremes five times. In each case, the S&P 500 trended up in the weeks that followed.
After Midterm Elections
There have been 18 mid-term elections since World War II. A year after these elections, the S&P 500 has been up 18 out of 18 times, with an average return of 14.5%.
Conclusion
It is never fun to give back your profit on the year and find yourself in negative territory. I’m by no means trying to dismiss anyone’s concerns or feelings. We are experiencing higher than normal volatility in our portfolio. Many of the benchmarks and sectors in the United States are off well over 10% from their highs. My advice is to hold on. Do not sell into this downturn. If you did, you’d most likely be selling near the lows of the market. If we do break the support levels from February/ April’s lows, we will be forced to start aggressively lowering our stock allocation to get more defensive. We will be ready to quickly reinvest into the markets once they’ve found their lows. We always keep a list of stocks that we’d put into the portfolio.
This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Polaris Wealth Advisory Group unless an investment management agreement is in place.
