January 2016 - Ninth Inning Investments

After starting the year off in sell mode, stocks are accelerating their declines and are now in correction territory. Yesterday’s rally sparked hope that a short term bottom was put in, however, this is not the case as the Dow Jones Industrial Average (chart) plunged 400 points at today’s open, the Nasdaq (chart) opened lower by over 100 points, the S&P 500 (chart) opened down over 2% and the small-cap Russell 2000 (chart) is now trading below 1000. What gives? First and foremost, China’s Shanghai Composite Index has lost over 20% of its value since late December and is now in a bear market. China’s market fall has indeed spilled over into the global markets. Secondly, crude oil (chart) has continued to decline and is now trading below $30 per bbl spreading fears of widespread bankruptcies in the oil and gas space. These two factors alone have been enough to send our markets into correction mode.

That said, what I try to do in this type of market environment is to place emotions in check and to keep things into perspective. Since this bull market began in 2009, we have not really experienced a market correction. Yes, it has been over six years since we have had a meaningful market decline that has stuck. People tend to forget that market corrections can be a very healthy thing for an overextended market. Investors and traders alike have been spoiled over the past six years by essentially taking their positions and switching on auto-pilot. I believe those days are gone and they should be. When the Federal Reserve took action and began their aggressive monetary policies i.e. buying bonds and placing interest rates at or near zero, stocks took off and did not look back. We have not been in a normalized market environment since then.

Fast forward to today and with essentially no Fed intervention and with a change in interest rate policy, we now have markets trading off of economic and corporate merits. This to me is not a bad thing because now investors can assess the value of the markets as well as individual stocks more accurately and more confidently. This is a concept that most traders and investors have been waiting on and that is to make their investment decisions based off of facts and not what the Federal Reserve will or will not do.

Good luck to all 🙂

~George

2015 essentially proved to be a flat to down year for stocks taking some investors and traders by surprise. The Dow Jones Industrial Average (chart) closed the year down 2.2%, the S&P 500 (chart) minus dividends closed down just under 1%, the Nasdaq (chart) closed up 5.73% and the small-cap Russell 2000 (chart) closed the year down 5.71%. What’s more is how crude oil (chart) fared in 2015 declining more than 30% which also had weighed heavily on the aforementioned indices.

Looking ahead to this year, stocks find themselves in a place where they haven’t been in quite sometime and that is a rising interest rate environment. Historically speaking, equities tend to be under pressure at the beginning of and throughout a rate hike cycle with the exception of cyclical stocks and certain commodities. However this time may be different. In the past when the Federal Reserve begins to raise interest rates it is usually to fend off inflation and/or to cool off the economy when it becomes too hot. From my view and from the data flow, this is not the environment we find ourselves in today. So I do not expect that the Federal Reserve would raise rates aggressively or too quickly. With that said, the markets might not trade the way they would if we were in an inflationary environment with rising interest rates. Nonetheless, I do think that more volatility will come into stocks in 2016 and it will become more of a stock pickers market.

Furthermore, the technical shape of the market appears to be setting up for more downward movement as the key indexes have breached or are about to breach their respective 200-day moving averages. However, it would take days of trading below their 200-day to set off an alarm at least from a technical perspective. Let’s see how the first week of trading in the new year plays out before making any sort of definitive technical opinion.

Both Paula and I sincerely wish everyone the healthiest, happiest, safest and most prosperus New Year yet 🙂

~George

Ninth Inning Investments

Month: January 2016

Stocks Are In A Tailspin!

Happy New Year!