Normal-ish

bell curve

October 11, 2021

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We got our first 5% pullback since October of last year, at a seasonally weak period. The past few notes I’ve sent highlighted September as historically the worst month for the S&P 500, with October in 2nd to last place. Notice on the chart below we were not able to hold the 50-day moving average and for the past week we have hovered around the 4360 level, with a higher amount of volatility. Again, this is normal for this time of year. Thinner trading volumes means it doesn’t take as many buys or sells to move price.

I’ve historically used this period of time to tax loss harvest, meaning look to sell anything that has a loss to offset any gains that the portfolios have collected. The talking heads will start to discuss this in late November or December, but my view is this is too late, as trading volumes pick up, you may not only miss the seasonal weakness in stocks but have to pay more for them in the future. AKA the Santa Claus rally.

From this point I will rely a little more on the technical (charts) to tell me when to buy back into this market. I look at the 5-day moving average against the 20-day moving average. (The most common measure is 50/200, however I simply take off the last zero, and I feel it provides a better short-term indicator of strength). Referring to the chart below, when the blue line, crosses the orange line on the way down, is called a death cross. On the flip side when the blue line crosses the orange line on the way up, that is referred to as a golden cross.

If this market continues to retreat from this level, I see support for it at around the 4200 level.  

This is the time I will again say, “I believe we are still in a long term secular bull market dating back to 2013, and it still has years, if not a decade to run.” Although I may trade short term from time to time, I certainly do not invest that way. There’s no better chart to show this than the one JP Morgan funds puts out each quarter.

It’s funny to me the responses I get to this quote, especially since I’ve been saying it now for about 7 years now. But what about the political environment, what about the taxes going up, what about taxes going down, what about government debt and the debt ceiling, what about, what about, what about????? We’ve dealt with it all before and it may have created short term volatility, but it hasn’t stopped the moving train of capitalism. 

Getting back to normalcy. It’s sure been a crazy past 18 months, and it feels like I’ve been hearing “the re-opening trade” or “normalization” for months now. I acknowledge we may never get back to the way it was 100% before Covid, (some things good like technology advances – zoom etc., and some not so good like constant screenings, injections, and masks), regardless we will eventually get back to normal even if it’s a new normal. What’s normal look like in the markets? It’s been so long since I’ve felt it.  normalized returns (10% per year), encompassing a 10-15% pullback on a yearly, as well as a couple of 5% pullbacks through the year, while still moving the markets higher on an annual basis. I know, it sounds crazy right? When you consider the S&P 500 going back 1 year is up 31.7%, and if you go back to the low on March 23rd last year is up close to 100%. That’s anything but normal.

Despite mentioning many times in recent articles, that a pullback may be coming, it still caught a few off guard. How quickly we forget what normal feels like. I understand it though. For most who stayed with their investing discipline after the Covid shock, have portfolios that are higher in value than they had before. A 5% or 10% pullback is a bigger number than it was before, even though we still value the amount of money the same as we did before the market run. I’ve never said watching a portfolio go down is easy, but it’s part of the normal process. 

In summary, I’ll go out on a limb and say this is a healthy, normal and should be expected 5%-10% pullback, that will likely bounce back once we get into earning season and past some of the gridlock in Washington. (Welcome to October). My last reference point will be the wise old bond market, that historically gives you some type of indication of trouble looming is not showing any signs at present, when measured by corporate bond yield against U.S. government bond yields. This tends to spike in troubled times.

With that here’s the buy/sell.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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