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Reaction to the Fed

Market volatility is on the rise with 200+/- point days on the Dow becoming standard. The market has taken back all of the short term gains leading up to the Fed’s decision this week plus a few points. For all the chatter about a rate hike being completely factored in, I am seeing some wild price action. Believe it or not, there is a critical level of support for the market almost exactly at the lows of today.






Since the Fed raised rates on Wednesday, we have seen several things happen that have spooked the market, none of which are very surprising to us but seemed to have caught the market off guard. For one, we saw the energy sector make a hard new low for the year, make that the last 5 years. We also saw selling again in the high yield bond market. Both have been on the media radar for a few weeks. As I’ve heard it, we must see stability in the energy and high yield bond markets. …. Or else. First of all, these two investment groups are related in their pain as many high yield bond funds have become overweight in soon to default energy bond issues. They have been tracking together for nearly two years. They are also likely to bottom at the same time as well which is on our watch list for potential buys in 2016.


Stocks have also sold off sharply in the last two days with things like Industrials, materials and technology leading the way lower. Recession trades in defensive sectors like consumer staples, healthcare and utilities have held up well or even moved higher. The market seems to think that the Fed’s rate hike will accelerate our economy’s slide toward recession. That may prove to be the case but even if the stock market is smart enough to forecast a recession 6-9 months out, that potential reality seems more likely in 2017 after elections, all things considered.


Treasury bonds have done nothing – as usual supporting my working theme that Treasury bond money is dead money (at best). Commodities have fallen again to marginal new lows but gold found buyers today while stocks got hammered. The gold miners index actually looks constructive at this level and seems unwilling to follow actual gold or the commodities complex lower. We took a small position (2%) in the GDX exchange traded fund in a couple portfolios last week that have space for “alternatives”.


Support Is Right Here!


Take a quick look at the chart below of the S&P 500 index. Way back on January 15th of 2015, the S&P 500 dropped quickly to 1992 (shown as the white line). This level also served as a short term peak on the first rebound from the August lows and now, after today, here we are again approaching the 1992 level. This is a critical support level and one that has the potential to hold. Why? Often we see a wrong way reaction to the Fed in the few days that follow a change of policy. Now, we have seen the negative reaction and push down to critical support with a market that is now approaching an extreme oversold condition. Sentiment has also swung back to an extreme in the last three weeks and everyone expects the worst at this point. I don’t want to sound too bullish because I’m not but this is a sweet setup for a strong run in the final nine days of the year and possibly well into 2016.



If the consensus view is right, and this very important level of short support is broken, then the likelihood of a heavy selling cycle into April of 2016 becomes more real – see last week’s update.





Being A Mature Investor – 101


I’ve had several conversations with clients recently with some common themes. I thought I would share those for everyone’s education. The general concern among our clients when looking back over the last 12-18 months is regarding the lack of returns or modest losses in total portfolio value. This is absolutely the case as most portfolios we have reviewed in the last several months are showing YTD returns of -3 or 4% nearly erasing gains made in 2014 in the process. The questions that follow are generally these:


  •      Is there something wrong with my portfolio?

     Why don’t we just sell everything and wait until the coast is clear?

     Should I be invested in other strategies?


Investors who have been at this game for years know that returns do not come in a straight line. There are regularly periods of time, sometimes 2-3 years! where gains are elusive and we get frustrated. We feel like something is broken or wrong when our money is not appreciating, especially after doing so for the previous five years. Mature investors are patient investors and do not switch strategies or take on extra risks in a failing attempt to continue making returns on their portfolio. They stick to their process and their plan in rising and falling markets. Mature investors do not go from 100% cash to 100% invested in leveraged stock ETFs either. This is the definition of gambling with emotional guessing at the root of all decisions. Selling all is guessing. Buying with all is guessing and I’ve never ever seen anyone do it with any level of consistent success in my career. Mature investors do not shift their risk tolerance just because the market is behaving badly. Risk tolerance is a function of your age, your wealth and income and your ability to tolerate losses of different magnitudes in the pursuit of desired gains. Mature investors know that a crappy year like 2015 creates real opportunities and they are always on the lookout to buy them when others are selling in fear and disgust. Mature investors know that the best way to increase your wealth is to add money to investment accounts when prices are low, not high.


I humbly offer this information as a gentle reminder because these are the days when investors of all types make reactive decisions regarding their investment strategies and investment process. This is not to be confused with unproductive investments. We all make investments or trades that lose money. We’ve had more this year than in any year of the last decade. But we don’t look at those as bad trades or bad process or bad decision-making but rather the cost of doing business in a market that lacks direction. But our process of Net Exposure, Selection and Position Sizing behind our portfolio remains exactly the same. Nothing is broken about any of our strategies and I will shamelessly tell you that I have more confidence in what we are doing today than at any time in our company’s history. Results will follow excellent process in the longer term. You can bank on that!


I wish everyone a warm and peaceful holiday week surrounded by good friends and family.




Sam Jones