July turned out to be another positive month in the stock market overall. The NASDAQ was up 2% and the Russell 2000 was up a half a point, with the Dow and S&P falling in between those two. It was nothing like the gains we saw in June, but positive is positive, right? Going into August, we could see some more negative days. This time of the year is usually when some of the most influential Wall Street movers and shakers take some time off and go to their vacation homes on Martha’s Vineyard or in the South of France. Any bad news usually has an outsized effect on the stock market. The fall of the year is when we’ve seen the worst market crashes in history; October 1929, October 1987, September 2001, September 2008. This is the time for us to be extra vigilant. We’ve spent over ten years in a market bull, and while age alone has never killed one, other accumulated circumstances certainly have. What could kill this bull? How about an ongoing trade war with China. Or maybe a Fed policy that guesses wrong. Or how about a terrorist attack on American soil? If enough people even suspect a crash is coming and start selling off, that could, in itself, cause a crash. The whole point of actively managing accounts the way we do, however, is to help avoid getting caught completely up in a crashing market. Being able to quickly pull the plug is what we are committed to doing. Doing that, however, can either save our clients’ assets from taking a hard hit down, or make us look like idiots by getting out of the market only to see it recover soon after we get out. As our research partner has said, at the beginning of it, a short-term downturn looks exactly like a long-term downturn. Since they all look the same at the beginning, the only choice we have is to make our trades as if the market is going into a long-term bear. It’s like when the farmers out in the Midwest hear the tornado siren start blasting away, do they continue plowing the fields or do they head for the basement? We know in the long-term, that strategy will serve us well.
***EXTRA EDITION – I wrote the above narrative BEFORE the Monday meltdown this week. As I write this extra portion it is early Wednesday morning, August 7th. The Dow reached a high on Monday of last week (27221) before it started a slow, then a rapid decline to a low of 25718 this Monday, losing 767 points on that day alone. Because the Dow had already lost 736 points from its high last week, our short-term market indicator was just barely positive at the end of the day on Friday. Monday’s debacle sent that indicator reeling downward and it gave us a strong sell signal. Our indicators don’t predict, they react. Therefore we have to wait for the market to tell us what its general direction is going to be. We were supposed to exit the market yesterday (Tuesday, August 6th) but I have been doing what I do for 35 years and I know that in the past, when the market has suffered a devastating day, losing 3% of its value, a lot of bargain hunters go shopping the next day and the market then makes up a portion of what it lost the prior day. This is what happened yesterday. With a 312 point increase, the market recovered 41% of what it lost on Monday. I decided not to get out of the market early yesterday, which would have caused us to miss that recovery. It was a good… well… non-move. What’ll happen today? Since the markets haven’t opened yet as I write this, we will just have to see. We are still leaning to a possible market strategy switch to a much more defensive position. The trade war with China is real and corporate earnings are deteriorating. So should you start getting a lot of mail or email indicating trades in your account, just be aware that we are making these moves to protect your assets from a further potential decline.