Market Commentary: Record Breaking Start to 2019
Written February 20, 2019
It’s been an interesting past few months to say the least. After having a dismal 4th quarter last year and a horrible December, the broad market is having a record-breaking start to 2019. US stock indices are up an average of 10% already this year, and the Dow Jones Industrial Average has logged its 8th straight week of gains.
Below is a chart of the S&P 500 for the past 12 months.
This chart is a technical analyst’s dream. First of all, the blue line (20 day moving average) dropped below the red line (200 day moving average) in October. For some, this is a rudimentary sell signal. A corresponding buy signal doesn’t happen until the blue line crosses back above the red line. As you can see, that hasn’t happened yet. The S&P 500’s price also dropped below the red line in October, another signal of market weakness. The S&P tried and failed to stay above the red line in November and December, and it’s making its third attempt now. Will it be able to stay above that red line this time?
Of course we don’t know for sure, but here’s another interesting indicator on this chart that might hold a clue: the RSI (Relative Strength Indicator) on the top of the chart. When this indicator drops below 30, it is a sign the market is oversold, meaning a short-term bottom may be forming. It crossed below 30 in both October and December. Conversely, when this indicator reaches 70 it is a sign that the market is oversold and a short-term top may be forming. The S&P 500 has hit 70 as of today.
As you can see, it hit 70 plenty of times last year and was able to skate above both the red and blue lines. But that was before the severe breach in the uptrend that happened in December. Also, the price is right at a key resistance level of 2800, a level the S&P was unable to maintain in November and December. Another component to this is that the momentum we’ve seen can’t continue. If it did, the market would be up 100% by the end of the year. In my opinion, the economic fundamentals aren’t there for a huge positive market year. The global economy, especially Europe, is slowing to the point of a possible recession, US earnings are slowing, and the Fed has affirmed this weakness by backing off their rate hike projections. In my opinion, what happened in December wasn’t enough to say we had an official “bear market” and we’re now in the clear. We may even retest those December lows in the months ahead.
If all of that is true, what should you do? If you’re a client of McDaniel Knutson and we’re managing your accounts, you can relax. We’ve already positioned your managed accounts to be more defensive. We’ve included assets in your TD Ameritrade managed accounts that limit some of the downside exposure to the market while still participating in some of the upside. For managed annuities, we’ve taken the risk scale down a couple of notches by mixing in balanced funds and bonds.
If you’re not a client of McDaniel Knutson, I encourage you to contact your financial advisor and ask them what their strategy is for your accounts. If you’re a do-it-yourself type of investor, now is a great time to rebalance your accounts, reevaluate your risk tolerance, and sell the chaff. If you want help with how to do that, give us a call. We’d be happy to sit down with you and talk through your portfolio with you. Your first meeting is on us, so you don’t have anything to lose by meeting with one of our advisors.**
- Victoria Bogner, CFP®, CFA, AIF®
**The views are those of Victoria Bogner and should not be construed as investment advice. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. Economic and performance information is historical and not indicative of future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take in accounts the effects of inflation and the fees and expenses associated with investing.
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