October, the month of the BIG DIP

Today is October 25, 2018 and I am choosing to write this article today because of the amount of “falling” the market has done so far this month.  Not sure I will get it published by the end of the day … but as I listen to Fox Business News on my other screen I will give it a try.

mark-twain-9512564-1-402Mark Twain (aka Samuel Clemons) the writer of Tom Sawyer and Huckleberry Finn was credited with saying, “October:  This is one of the peculiarly dangerous months to speculate in stocks.  The others are July, January, September, April, November, May, March, June, December, August, and February.”  Now I don’t know why he listed them in that order … but he did.  He also said, “The secret of getting ahead is getting started.”  And he also said – and I truly do believe – “If you don’t read the news paper you are uninformed, if you do read the newspaper you are misinformed.”  The same can be said about what you hear on the TV – even though I am listening to it as I write this.

There is one side that thinks things are terrible and that the market is moving into Bear Market Territory … and the other side that says this is nothing more than a “correction” that all bull markets need.

What is a bear market?

A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining.  Investors anticipate losses as pessimism and selling increases.

Some will tell you that a poor economy will lead to a bear market.  Is this true?

What is a bull market?

This is a period that often leads to overvalue of stocks as the investors are highly optimistic and believes the stock will always go up.

Some will tell you that a good economy will lead to a bull market.  Is this true?

The use of Bull and Bear comes from the way animals attack their opponents.  A bull thrusts its horns into the air, while a bear swipes its paws downward.

The economy IS NOT the stock market!

Above I asked two questions …

  • Some will tell you that a poor economy will lead to a bear market.  Is this true?
  • Some will tell you that a good economy will lead to a bull market.  Is this true?

While the economy could lead to either … it is not necessarily true.  Look at it this way.

From 2008 through 2016 we literally had a terrible economy … very high unemployment rates, very low interest rates and inflation rates, a terrible trade imbalance with countries overseas, taxes (corporate and individual) were rising, companies were moving operations out of America … and what did the markets do?

  • In 2008 the markets were still trending down … but from January 2009 through December 2016 the markets changed as follows:
    • The Dow Jones Industrial Average went from 9,034.69 to 19,762.60 = +118.74%
    • The S&P 500 went from 865.58 to 2,243.63 = +159.21%
    • The NASDAQ Composite went from 1,632.21 to 5,383.12 = +227.05%

So on average … during a terrible economy the markets as measured by the big three indices rose an average of 168.33% over an 8 year period.

Since January 2017 everyone keeps telling us the economy is improving.  Unemployment is at is lowest point in the last 50 years (and in some areas at the lowest point in history of record keeping), interest rates are starting to rise along with inflation slightly, trade imbalances are shrinking, American companies are coming back to America, and individual and corporate income taxes are reducing.

What did the markets do over the past two years?

In January 2017 through September 2018 this is what we saw:

  • The Dow Jones Industrial Average went from 19,762.60 to 26,458.31 = +33.88%
  • The S&P 500 went from 2,238.83 to 2,913.98 = +30.16%
  • The NASDAQ Composite went from 5,383.12 to 8,046.35 = +49.34%

So on average … during a pretty good economic period the markets as measured by the big three indices rose an average of 37.79%% over a 1 year and 9 month period.

I’ve often told my clients over the years that while the economy can influence the markets … the markets are not solely controlled by the economy.  You see, the economy is driven by hard fundamentals.  This would be things like Gross Domestic Product (GDP), Trade with foreign countries, Monetary Policy of the Federal Reserve (aka Interest Rates), Inflation, Employment or Unemployment, Corporate Profits, etc.

While the economy can influence the markets, what really drives them are emotions … two in particular:  Fear and Greed!

The market loves to see money being spent.  The market really does not care if it is consumers spending the money, corporations spending the money, or even governments  spending the money, as long as money is being spent.  When people get greedy they want, want, and want and spend, spend, and spend money.  When people become fearful they tend to hold back on the spending and keep it in their pocket and the market feels and sees this.

So what has happened this month?

Let’s take a look at three charts, then we will look at the numbers for the charts.  These charts will show the price of the index (Green Mountain), the 50 Day Weighted Moving Average Price (Blue Line) and the 200 Day Weighted Moving Average Price (Red Line), and a dotted line showing the drop from the all time high (which did occur in the past three months) to the recent low for this three month period.

The Dow Jones Industrial Average

DJIA

While the drop appears drastic, it is not that drastic as you will see when we get into the numbers below.  The positive news is the 50 Moving Average is still above the 200 Moving Average even though the price is below the 200 Moving Average.

The S&P 500

SPX

The NASDAQ Composite

IXIC

Correction vs Bear Market (by the numbers):

Index Numbers

 

We’ve been told time and time again that a Bear Market will begin when and if the price of the index falls from it’s recent high by 20% or more.

So, far, we have nothing more that a Market Correction – which is good for Bull Markets.  The DOW has corrected by 8%, the S&P by 9% and the NASDAQ by 12% as of close of business yesterday.

 

To consider that we are headed into a BEAR market we would have to drop to about 21,462 on the DJIA, to 2,344 on the S&P and to 6,487 on the NASDAQ.  Those, would be the “Lines In The Sand,” if you’re looking for any.

Could it happen?  Yes.  Is it likely to happen?  I don’t think so.  I think currently there is a lot of FEAR in the markets with the so called trade wars between the US and China and the upcoming Mid-term Elections, but I also think “these too, shall pass” and the markets will start to trend higher again.

Now would be a good time, however, to start putting together a shopping list – if you like to do your own research.  Or, if you just want to be a prudent investor, consider investing in one or more Index Funds (Exchange Traded Funds – ETFs).

Some of the index funds you could consider would be as follows:

  • Dow Jones Industrial Average ETF (DIA)
  • S&P 500 Index ETF (SPY)
  • S&P 400 Mid Cap Index ETF (IJH)
  • S&P 600 Small Cap Index ETF (IJR)
  • Nasdaq 100 Index ETF (QQQ)

Of course you will want to discuss this with your financial advisor before leaping in … and you should wait until we have a true up market trend before getting in.  However, had you invested $45,000 (about $9,000 in each of these funds) back in 2009, this is how they could have performed (NOTE:  I used IVV the iShares S&P 500 Fund here rather than SPY … but they are about the same):

Buying the Indices

Even with the ups and downs … I don’t think any of you would be real mad for investing $45,000 and nine years later having it worth $150,000.  It should be also noted that this system I use does not track dividends.  By reinvesting dividends over this 9 year period – since all funds here provide dividends – your profits would be a lot greater than is shown.

So what should you do … ?

  • Be patient, the market will bounce back.
  • Start putting together a shopping list of stocks or funds you want to buy (assuming you have cash on the sidelines).
  • Prepare with your financial advisor so that he knows what and how much you want to buy.  Tell him/her in advance so that when you call later he/she can be ready to “pull the trigger” for you.
  • Let the market end up for a few days in a row before getting back in.
  • Depending on the amount you have to invest … consider spreading this out over 2 to 4 investment periods.  In other words if you have $100,000 to invest you may want to invest about $34,000 at first … then a few weeks later, if the market is still trending up, another $33,000 and a few weeks after that, if the market is still trending higher, the final $33,000.  Make the trend your friend.
  • If you are a real prudent investor, consider using a stop loss or a trailing stop loss.  Your financial advisor can help you with this.  I personally use a 15% to 20% stop loss or trailing stop loss so that the assets won’t normally sell for a moderate correction but will sell for a major entry into a Bear Market, but you have to decide what is right for you.

In Closing, here’s a look at the Dow Jones Industrial Average by the minute this week:

Weekly DJIA

SATBIYTC = Stick Around The Best Is Yet To Come!  Thought I’d tell ya before you drove yourselves crazy trying to figure it out.

Jerry Nix

 

 

 

 

 

3 thoughts on “October, the month of the BIG DIP

    1. Carl, thanks for continuing to read. Do not let this little bump in the road sway you into making illogical decisions. Always keep those stop loss orders on and let them take you out of the market … not emotion.

      Like

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