Markets Mounting a Comeback?

Two hurricanes in the course of two weeks! And Irma ranked No. 7 on the list of most powerful hurricanes, just behind Katrina (No. 3) and Andrew (No. 4), for those keeping track of such things. Harvey tied for 18th in the ranking.

We are ready for a comeback.

Last week, before this weekend’s arrival of Irma, saw the nation’s resilience on display in Texas. As the state dried up, the people rallied to return home and begin the rebuilding process. This week, I expect the process to be repeated as Floridians leave the shelters and begin salvaging their lives from the ravages of Mother Nature.

Our thoughts and prayers go out to residents of both states as the recovery progresses. And they also go out in thanks to those service providers, fund contributors, product suppliers, and medical professionals from other states that have responded and given so generously. (You, too, can donate to their relief efforts here.)

This week we also remember the events of 9/11. I watched the services at the site of the former World Trade Center. Once more I heard the reading of the names of those we lost.

In the sadness that this still evokes from us, it is gratifying to be able to offset (if only in part) thoughts of our losses with the realization of the recovery that followed. The debris was cleared away, and a new, truly unique, skyscraper emerged from the site, along with a new memorial that will ensure that we will never forget. What a comeback!

On a much less important note, I attended the first game of the new football season this weekend in Detroit. Despite predictions of a so-so season for the Lions and an almost 60-year anniversary since their last national championship, Ford Field was packed, and the place was rocking as the ball was kicked off to the visiting Arizona Cardinals.

After a first half that was marked by fumbles, interceptions, and innumerable penalties and miscues, the score was 19 to 0 against the Lions, and the crowd was quiet. I know I was stunned.

Yet, by the end of the game, the Lions had won, 35 to 23. With fans roaring, I shouted to my wife sitting beside me, “The first half was as terrible as the fourth half was great!”

Americans love the underdog, and comebacks are manifestations of that.

What sets apart a team, a nation, or a person who can mount a comeback from adversity from one who cannot? Psychologists tell us that it is mental toughness.

Mental toughness is a part of the inner game, whereas the outer game is dominated by the physical condition of the opponent. Mental toughness is, according to Sports Performance Consultant Dr. Alan Goldberg, “composed of handling pressure, dealing with mistakes, managing psych-outs & intimidation, maintaining concentration, withstanding momentum shifts and being able to come back when your back’s against the wall.”

We see this in the world of finance as well. Professional traders have developed the mental toughness to deal with the losses that the financial markets can often deliver.

They have learned when to stick with their original principles on a long-term trade and when to cut their losses quickly on a short-term opportunity. If they don’t learn this, they do not survive in the profession. They must have this mental toughness.

Part-time investors rarely develop this. They are much more influenced by the emotion of the trade. When a loss grows, they will often hold on because they do not have a game plan that accounts for it.

Intermediate- or long-term trading requires the resolve to hold one’s position as long as it remains consistent with the original game plan. If the investor does not understand this, when their loss grows too large they will often abandon the trade at the wrong time—just before the trade turns around. This tendency is the real reason why so-called buy-and-hold investing does not turn out as planned and is why most investors cannot stick with it.

Adopting disciplined rule-based strategies can level the playing field between the professional traders and other investors. They eliminate the emotions because they are based solely on the numbers.

With quantitative traders, every decision to buy and sell is determined by a computer program. These are based on time-tested rules that have been quantified and tested in different market environments to eliminate any guess work. Computers provide the mental toughness to focus on the necessary trades in the here and now. They have no attachment to the past to cause emotional discord.

As Dr. Goldberg stated: “So when you’re hopelessly down and out, the way that you get yourself back in the game or match is NOT by focusing on how far behind you are and how badly you’re being beaten (this will only cause you to lose the mental game), but by keeping your concentration on one point/play at a time in the NOW. Comebacks happen when you refuse to quit and narrow your focus to only what’s in front of you, one play at a time.”

That’s just what disciplined, computer-based strategies can do for you. In the current environment, they can provide the basis for you to come back to investing without the worry or the commitment of time necessary to avoid the next market turndown.

Market update

The stock market staged its own comeback after a couple of down days last week. While on Friday (9/8) the S&P still remained down for the week and below the new high registered on July 27, Monday’s rally took us to new higher ground intraday. Let’s hope it is a true comeback.

As I stated a few weeks ago, it is very important to the health of the stock market that a new high is registered in short order. A failure to do so might turn the July new high into a market top with a correction not far behind.

As I explained in that article, a failed attempt at a new high can signal the start of such a correction. Historically, the market has fallen at least 5% within nine to 21 trading days of a failed attempt at a new high following a market top.

At the time of that earlier article, we were concerned by the August 19 failure to reach new heights, but we made it past the nine- to 21-day window without such a fall. But yet another failure occurred on September 1. We are definitely rooting for that comeback.

There certainly is evidence of a comeback from the hurricane destruction. The Wall Street Journal points out insurance stock prices have bounced back, as have cruise line issues. And the “fear index” (VIX) and safety plays in gold, bonds, and even orange juice futures have ended and seen prices tumble.

Even the U.S. dollar is making a comeback. But that will take a lot of doing. The dollar is in the midst of its greatest fall (absent an act of devaluation) on a year-to-date basis through the end of August since 1972. It’s the reason why you may want to consider adding global investment strategies to your portfolio.

At the end of last week, I noticed that our best-performing index in the U.S. has been the NASDAQ, with a more than 22% YTD return. Yet, world stock index returns are littered with gains of more than 25%. Emerging markets lead the pack. They have made a great comeback, returning to profitability after three down years.

There were few economic reports to focus on last week. More underperformed than outperformed, as has been the case for the last couple of months. Most market observers are expecting that to continue as the impact of the two hurricanes on the economy is likely to be negative.

This was certainly the case with the unemployment claims numbers last week. They jumped from a 225,000 prediction by one economist to a realized rate of almost 300,000. With two major states under siege by the weather, this is to be expected, but records of past hurricanes suggest a quick two- to three-week comeback in these numbers.

Finally, one comeback occurs every year like clockwork. Students traditionally come back to school around the Labor Day break in this country. With the stock market clearly on vacation since the end of July, let’s hope that investors come back as well.

Weekly Edge: Relief from Irma and Geopolitical Unrest

The markets appear to have shrugged off concerns from Irma, North Korea, and the month of September. September is typically the most challenging month of the year, but it precedes a market boom as we head into the holiday season.

The largest move that has occurred so far was on Monday (9/11), as the market sharply rebounded after a small decline on concerns that Hurricane Irma could pose a significant threat to Florida’s economy as well as insurance and reinsurance companies alike. The hurricane was largely less extreme than was predicted, allowing the market to take a breather from potential risks and enjoy market gains. At the same time, markets had been pricing in the possibility that North Korea could test another nuclear weapon (coinciding with a North Korean holiday last weekend). This test did not materialize, and the threat appears to be taking a back seat to risk-taking in the market.

It’s uncertain whether this reprieve will be sustained. However, most indicators in the U.S. market continue to suggest growth and that the small sell-offs we’ve seen over the past few weeks will be the exception rather than the norm for the time being.

Sectors: The leading Sector Benchmark ETFs exhibited further positive shifts over the past week. Health Care and Materials rose, and Telecoms fell significantly. Momentum scores of most sectors increased for the week. The only exception was Telecommunications. Financials broke even, coming out of the red. The spread between the highest and lowest increased from 35 to 49. In terms of ranking organization, there appears to be no general trend between cyclicals and defensive sectors, continuing last week’s trend. Technology, which increased slightly, performed just above Utilities (a typically defensive sector). Energy improved significantly from last week, though it is still slightly negative. A mostly positive increase in momentum for most sectors suggests the potential for a market increase.

This all occurred as the market breathed a sigh of relief that the effects of Irma were less than expected and the anticipated nuclear tests of North Korea did not occur.

Factors: The leading Factor Benchmark ETFs all had positive results for the week. Momentum and Growth remain in the lead, though Growth slightly edged out momentum. High Beta and Value remain at the bottom. Risk-off factors such as Quality, Yield, and Low Volatility were dispersed. Quality was in the center, Yield was lower, and Low Volatility was toward the top. The overall momentum ranking for all factors increased once more last week, with the average momentum score changing from 5.7 to 10.6. The spread lowered from 19 to 15.

Global: Rankings in the leading Global Benchmark ETFs were mixed last week. Latin America and China remain at the top of the rankings. Overall momentum scores have risen slightly for the week. Developed countries climbed the most, with USA increasing from 5 to 12 and the UK increasing from 6 to 16. Emerging markets increased slightly, from 28 to 31. The average momentum score globally increased from 18.3 to 25.1. USA and Japan were at the bottom in terms of absolute rank. Developed markets seem to be on the rise for the week, as Canada also increased from 16 to 24, another jump of 8 points after the previous week’s rise of 8.  

Disclosure: No communication by Dynamic Performance Publishing or our employees to you should be deemed as personalized investment advice. Any investment recommended in this newsletter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Dynamic Performance Publishing, its affiliates, and clients may hold positions in the recommended securities. Results are not indicative of holdings for clients of Flexible Plan Investments. Forwarding, copying, or otherwise duplicating this information for the use by anyone other than the intended recipient is expressly forbidden. These results are not representative of those achieved by clients of Flexible Plan Investments, Ltd. (FPI) due to differences in security selection, timing of trades, transaction fees, and FPI’s management fees.

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