November 19, 2018: Is The Recent Downtrend Sustainable?

Nov 20, 2018 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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Is The Recent Downtrend Sustainable? 

Though major US stock indexes have crossed their de facto 200 days moving averages a while back, recent fluctuation of these index prices has given investors hope that the current downturn is a blip. Unfortunately, last week, stocks retreated again. Naturally, one would want to look at the trends of all risk assets to get some idea on how broad the current downtrend is. Let’s first take a look at the trend scores of the major assets. 

REIT has withstood the current downturn

Major asset trends as of 11/16/2018:

Description Symbol 1 Week 4 Weeks  52 Weeks Trend Score
US Equity REITs VNQ 0.24% 3.42% 0.17% 2.07%
Treasury Bills SHV 0.05% 0.16% 1.64% 0.65%
US Stocks VTI -1.47% -0.9% 7.53% 0.32%
Mortgage Back Bonds MBB 0.81% 0.81% -1.01% 0.19%
Intermediate Treasuries IEF 0.97% 1.25% -2.5% 0.12%
Municipal Bonds MUB 0.43% 0.59% -0.6% 0.01%
Total US Bonds BND 0.41% 0.46% -1.82% -0.24%
US High Yield Bonds JNK -1.51% -1.68% -0.62% -1.21%
Gold GLD 1.0% -0.34% -5.89% -1.53%
Emerging Market Stks VWO 2.96% 3.94% -9.58% -3.23%
International Developed Stks VEA -0.82% -1.65% -6.48% -5.03%
Commodities DBC -1.71% -9.18% -1.23% -5.48%

Surprisingly, REIT (VNQ) has stood out among all of the risk assets: it went against the stock downtrend in the past 4 weeks and actually has a meaningful positive trend score. 

We see a similar trend among dividend paying stocks: many dividend ETFs have been relatively stable in the recent selloff. You can find a few of dividend ETFs that have positive trend scores on 360° Market Overview. 

Notice also that commodities (DBC) went from a positive trend score to a very negative one (in fact, the lowest) in just a few weeks. Talk about the volatility of commodities!

Meanwhile, sector wise, the usual defensive sectors like healthcare, consumer staples and utilities are again strong:

US Sectors Trend (as of 11/16/2018)

Description Symbol 1 Week 4 Weeks  52 Weeks Trend Score
Healthcare XLV -0.98% 0.58% 14.97% 5.33%
Consumer Staples XLP -1.34% 2.51% 5.09% 4.43%
Utilities XLU 0.02% 0.57% 1.68% 3.19%
Consumer Discretionary XLY -3.32% 0.03% 15.08% 1.61%
Telecom IYZ -1.04% 0.11% 1.75% 0.81%
Technology XLK -2.33% -2.57% 9.13% -0.63%
Financial XLF -1.22% 0.45% 3.7% -1.14%
Industries XLI -0.59% -1.63% 3.91% -1.6%
Materials XLB 0.47% 4.03% -3.62% -2.37%
Energy XLE -1.93% -6.08% 2.42% -5.29%

How severe is the recent selloff?

The recent sell off is still very minuscule at an index level: S&P 500 is only off about 8% from its historical high while Nasdaq composite has dropped a bit more than 13%. However, for some high fly stocks like FAANG (Facebook, Apple, Amazon, Netflix and Google), they have all dropped more than 20% from their highs. Facebook, in fact, dropped more than 39%. 

We can also look at how uniform the current selloff is at individual stock level:

We purposely show the chart since 2007. The above chart shows the percent of stocks in NYSE that are above their 200-day moving averages. From the chart, even though so far, over two third of NYSE stocks are under their 200 days moving averages, the ratio (30.4) is actually still not comparable with those in 2008 (at one point in that year, over 98% of NYSE stocks were under their 200-day moving average), 2011 and even 2016. 

Interestingly, the current ratio is actually similar to that in late 2007 – a time when S&P 500 went under its 200 day moving average. If the downturn in 2008 is any guide, that would mean it can take as many as 9 to 10 months to materialize a significant drop (which happened in September 2008). 

What we know and don’t know

We don’t know precisely how long the current correction will last. From the above, we can say that the current correction, however severe on technology stocks (and other high growth stocks), is still not comprehensive and uniform enough. Investors seem to try to escape from these high fly stocks to quality/value ones for now. Our conjecture is that if the current economy can sustain its growth rate, the correction might soon be over and investors will flock back to risk assets again. 

However, the current correction can turn into a serious one (or bear market) if the economy turns south or if the corporate profit margin begins to revert to its mean even without a recession – S&P 500 profit margin has been consistently at some historical high levels since 2008. Factors can have some adverse impact on the high profit margin: high interest rate (increasing financing cost) , high labor cost (high wages) and/or high product cost (such as caused by trade war/tariffs). 

As always, the best way is to stay the course. In a volatile time like this, it becomes even more important. 

For more detailed asset trend scores, please refer to 360° Market Overview. 

In terms of investments, U.S. stock valuation is still at a historically high level and it might still have a bigger correction. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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