If you were hunting for Red October here’s a late bulletin: we found it.  No, not the Russian submarine but something equally underwater: Wall Street.

October is notoriously volatile. The most troublesome drops have typically been in that month, most noteworthy are 1929 and 1987. Thanks to the progressive applications of various safety valves the markets have improved their resiliency over the years. The crash of 1929 wasn’t fully complete until 1932 and did not fully recover until 1954. The 22% Dow drop of October 19, 1987 recovered in two years.

Electronic trading has given us the ability to move markets very quickly, both up and down. We have had a few flash crashes that actually recovered in a few days. (Once in a few hours!)

Technology always brings the unanticipated: when you invent the airplane, you also invent the airplane crash. The point here is that markets sometimes get caught up in their own vortex. At such times it may well be best to stand back and let the temper tantrum run its course.

In our current situation it appeared that the confluence of spooks had in large part retreated by Halloween. We were happy to see that and were hopeful that attention could turn to a glass half-full mentality. It IS earnings season after all, and something like 83% of reporting companies turned in better than expected results.

Thinking is useful but it doesn’t always lead to knowing. A cursory scan of all the pieces on the chessboard continues to show more good elements than bad but as a former secretary of defense once said ‘there are also unknown unknowns’.

Among the good news was the significant Friday jobs report (Nonfarm Payrolls) which showed yet another 246,000 jobs added and also important was that the participation rate continues to grow. Both of these data points are good for expanding GDP. In the longer view it’s nearly impossible for markets to trend south while GDP is trending north.

Watch this space.

Market Minute – And now a Technical Note

Many of you have mentioned that you enjoy hearing (in small bits) notes related to the technical signals in the markets. If you are one of those faithful readers this update is for you. Specifically, this is in response to questions about the current shape or health of the markets.

Have a look at this chart of the S&P500 Index*.  It is a chart that was current this morning at about 1pm Eastern time (that’s about three hours before the close of markets today.)

We’re looking at the S&P Index* because it’s a good general gauge of overall markets. In particular, we’re looking at the 200-day moving average (200MA) of the index, shown as a blue line. The time period covered is one year, and the grey line is the actual price movements of the Index. The chart is one of the most basic, and simplest of technical gauges – therefore followed by many people. 

The key to the chart is that a 200-day moving average is a good general line of demarcation. 

When market prices are above the line the market is generally trending up, and when the prices are below the line, markets are generally trending down. Note that over most of the one-year time period the daily price of the Index has been above the 200MA, although it’s certainly had its ups and downs. That tells that the market has generally been moving upward, and has been generally healthy. You’ll also note that since about 2 weeks into October the market price has dropped below, and then flirted with the actual MA line. Moves above and below an indicator within a short time period are known as ‘whiplashes’. They tell us that price is moving but doesn’t give us a good indicator which direction it’s moving. Another key is that prices above the 200MA tend to use the 200MA as a support line. The prices tend to bounce off of the 200MA and move back up. When the prices have dropped below the 200MA, however, the 200 MA tends to act as resistance, and the prices tend to bounce off of the indicator to the downside!

So where are we now?  Despite the fact that the indicator has looked good most of the year, at this moment the index price is below the 200MA, which is one of the reasons we have reduced equity holdings in our clients’ portfolios. Given the preponderance of good news regarding the economy, the markets will, I believe, catch up to the good news, and reverse to the upside and cross the indicator line. We are optimistic that we’ll see a strong end to this calendar year, but are waiting for Mr. Market to indicate that there are enough buyers in the market to push the price back above the 200MA, and stay there for a while. Until then we have a bit of caution keeping us where we are.

 

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this  information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

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