November 2018 Market Commentary
Feeling Grinchy before the Holiday Season
In our past commentaries we have talked about the 5-Step Uptrend Process.
There are typically five steps the market goes through in order to resume an uptrend.
- The market is first oversold, which we saw at the beginning of this year.
- It then displays positive divergences, which happened in the first and the second quarter of this year.
- These two steps are then followed by a failed rebound which we have seen a few times this year and may be in one at the time of this writing (November 23, 2018).
- The next step is a retest of the highs established in late January of this year, which has happened.
- The final step in a successful resumption of an uptrend, is a breadth thrust on the upside. This is still missing.
One variable of particular interest is that we not only had retests of previous highs but have exceeded the high established in late January. However, as we went past this high we never saw the enthusiastic buying similar to the selling we saw in January and February of this year. The rallies that took us where we sit today (at new highs on S&P Index 500), have been very narrow (lacking breadth) and apathetic (lacking an upward thrust and breadth*) which are not typical of a sustainable rally. Therefore, the rallies in February, March, July, and August failed to produce a breadth thrust signal to satisfy our urge to call the resumption of this uptrend that has been intact for almost a decade. And until that happens we believe that the equity market, particularly the U.S. equity market, will remain stuck between step 3 and step 5 in the 5-step bottoming process.
In the absence of the upward breadth thrust and the market’s negative technical posture, we have made an allocation that reflects our opinion which turned mildly defensive over the short to intermediate term. We are also on track to have the first year with no asset class returning 5% in almost 5 decades. There are other market variables that are mood changing for us, aside from our quantitative models feeling Grinchy in the midst of this Holiday Season. Last year, the stock market had plenty of reasons to rip higher as we got tax cuts, fiscal stimulus, soaring home sales, while interest rates were relatively friendly. This year, not so much. There has been a wave of quantitative tightening, home sales have started to slow and there isn’t much hope for a fiscal stimulus with a split congress. Not to mention, the trade war with China has been escalating lately as well.
The equity market can still resolve itself on the upside, but we need to watch the tape action over the next couple of months to be convinced. This is consistent with our opinion that we are in the midst of a secular bull market for equities but a wave of quantitative synchronized global tightening and other uncertainties’ mentioned above may be getting in the way of different asset classes.
The Investment Team recently reallocated and/or rebalanced the Adaptive Intelligence Models on the Solutions platform based on our current market outlook.
- In the Conservative Income portfolios, we reduced exposure to Domestic Equity (Large Cap), Foreign Equity (Developed Markets), High Quality Debt and Alternative Fixed Income, and we increased exposure to High Yield Debt, Foreign Debt and Cash.
- In the Conservative Growth and Income portfolios, we reduced exposure to Foreign Equity (Developed Markets), High Quality Debt and Alternative Fixed Income, and we increased exposure to High Yield Debt, Foreign Debt and Cash.
- In the Balanced portfolios, we reduced exposure to Domestic Equity (Large Cap), Foreign Equity (Developed Markets) and High Quality Debt, and we increased exposure to High Yield Debt and Foreign Debt.
- In the Total Return portfolios, we reduced exposure to Domestic Equity (Large and Small Cap), Foreign Equity (Developed Markets) and Alternative Fixed Income, and we increased exposure to High Quality Debt, High Yield Debt and Foreign Debt.
- In the Appreciation portfolios, we rebalanced to the current asset allocation targets.
- In the Growth portfolios, we reduced the exposure to Alternative Fixed Income, and we increased exposure to Domestic Equity (Small and Mid-Cap).
- In the Absolute Return Portfolio (ARP), we reduced exposure to Domestic Equity (Large Cap) and Foreign Equity (Developed Markets), and we increased exposure to Foreign Equity (Emerging Markets), High Yield Debt, and Foreign Debt.
Unless something has changed with your investment time horizon, objectives and risk tolerance, there is no compelling reason to change your investment discipline or your portfolio at this time. We believe investors who stick with their investment strategy and maintain a diversified portfolio are prepared for future market shocks and are well positioned for market hits.
*Breadth thrust is a technical indicator used to ascertain market momentum and signals the start of a potential new bull market after what may have been an oversold market. Source: NDR
Shashi Mehrotra, Chartered Financial Analyst, is the Chief Operating Officer and Chief Investment Officer of Legend Advisory. The opinions and predictions expressed herein are those of Shashi Mehrotra solely and not necessarily the opinions or expectations of Legend Advisory or any of its affiliates. Such opinions and predictions are as of November 23, 2018, and are subject to change at any time based on market and other conditions. No predictions or forecasts can be guaranteed.
Current market and economic data is as-of November 23, 2018. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
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