|LYONS MARKET UPDATE – Monday, December 17, 2018 The S&P 500 Index is down about 1%, YTD! From January 1, 2018 to September 20, the S&P 500 was up over 11% and now has a negative return for the year. What caused this “week” to be so “weak” and lose 1.4%? I believe potentially higher rates by the Fed and more trade tariffs are the main culprits for the market’s decline. Historically, the market tries to discount today what it expects in the future and when the future seems cloudy, stock prices tend to decline. PE ratios are now contracting after many years of PE-expansion due to “easy money” policies and the market is trying to work off this “excess” daily. If the Fed raises rates on Wednesday (as expected) and does not communicate a “dovish” (lower rates) tone of “one & done”, then a “Christmas Crash” could be in the cards. If the Fed does not raise rates, that may indicate the Fed sees slower economic growth ahead which would likely hurt corporate earnings. Lower expected earnings would likely cause estimates to be adjusted downward which would likely cause stock prices to decline even further. I believe whatever action the Fed takes or does not take on Wednesday could give the market an excuse to trade lower. I am seeing methodical and systematic distribution by institutions as they sell into the rallies the algos create. I believe we may be headed for a “Beary” Christmas and a not so Happy New Year! |
A Bear Market is when sellers overwhelm buyers! We have been in a Bull Market (more buyers than sellers) since March 2009 and I believe the market is tired and due for a rest. It might be hard to recognize a Bear Market when we see one because we may still have our Bull Market blinders on. After the 2008 Financial Crisis, Global Central Banks began injecting liquidity (QE) into the system which pretty much created a global “tide that lifted all boats”. The US Fed and European Central Bank (ECB) have confirmed that QE is officially over. We are now in a global Quantitative Tightening (QT) cycle where Central Banks around the world are decreasing the size of their Balance Sheets and raising rates in a concerted effort to “normalize”, whatever that means. I believe they create the mess, so we will have to rely on the them to get us out of the recessions they create. I do not see a recession until maybe 2020 but I do see an economic slow-down in 2019 that could allow the Bear to claw its way much lower. If you do not have an exit plan to manage your investments, now might be a good time to draw a line in the sand. No one will ring a bell and tell you it is time to raise cash so do yourself a favor and pay attention to your bottom line every day. Remember, no one cares more about your money than you do!
The Russell 2000 Index trends even lower! The small-cap Russell 2000 Index peaked on August 31 which was one month before the three major indexes reached their market tops. The Russell has now rolled over on lower lows and I expect the three indexes to follow suit shortly. I do not see institutional support of former leading FANG stocks like: Facebook, Apple, Netflix and Google as they all trade below their 200-day moving averages. In fact, I see lots of institutional distribution/selling in former leaders and that tells me that they are more interested in selling than buying. I pay a lot of attention daily to big volume movers up and down because that is a sign that the “smart money” is up to something that I might need to heed. Junk Bonds and Floating Rate Bonds are also telling me that risk is high, and the bottom has not been formed so the worst may not be over.
Cash is a Position I am comfortable with for now! I do not have any exposure, long or short at this time in the Fund but I am “paper trading” a few short positions to hopefully gain an “edge” of conviction. Sometimes you can win by not losing. I have the freedom to invest wherever I see opportunity and currently the risk is too high on the long side. I am studying and reading books on the Bear Market because that is where I believe we are, until proven otherwise. There are a few stocks that have been doing well in this environment, but I believe if/when the market takes another leg down these “few” stocks will fall hard and fast. The potential small reward higher on the long side is not worth the risk of a steep price decline, in my opinion. My advice is to keep your powder dry, so you can live to invest another day! (Portfolio holdings are subject to change at any time and should not be considered investment advice. There is no guarantee that any investment will achieve its objectives, generate positive returns or avoid losses.)
Bottom line: I maintain a “flexible approach” to invest wherever I see opportunity and I eat my own cooking. Risk appears Very High so Cash is where I sit until I get more conviction. I am currently focused on the short side patiently waiting for a lower risk opportunity. Weak sentiment is Trumping the strong fundamentals. Liquidity is shrinking, and stock prices are falling. The market does not care what we think. It will do what it does. We all need to remain humble and teachable if we want to win in the end. Have your stocks been naughty or nice?
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Important Risk Information
Mutual Funds involve risks including the possible loss of principal.
The Fund may hold cash positions when the market is not producing returns greater than the short-term cash investments in which the Fund may invest. There is a risk that the sections of the market in which the Fund invests will begin to rise or fall rapidly and the Fund will not be able to sell stocks quickly enough to avoid losses or reinvest its cash positions into areas of the advancing market quickly enough to capture the initial returns of changing market conditions. The Adviser’s judgment about the attractiveness, value and potential appreciation of particular asset classes and securities in which the Fund invests may prove to be incorrect and may not produce the desired results.
Investments cannot be made in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
S&P 500 Index is an unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large- cap stocks.
Russell 2000® Index is an unmanaged index that is a widely recognized indicator of small capitalization company performance. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
Long: Buying a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.
Short: Any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume they will be able to buy the stock at a lower amount that the price at which they sold short. NLD Review Code: 9123-NLD-12/17/2018