A Benign Bear Market


Mother's Little Helper portfolio was DOWN today -$1,987.70 (1.92%).

Overall GAIN YTD: +$3,339.43 (+3.34%).

Our benchmark index, the S&P 500 is UP +3.31%

http://money.cnn.com/data/markets/sandp/

"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb."

- Warren Buffett (1993)

I made my buys for the year on December 28, 2018, see the new portfolio here (Click Here).

DOW Down Demonic 666

The DOW closed down -666 points today, is there some demonic meaning in that? The S&P 500

was down -59.85 to 2,762.13, even the tech heavy NASDAQ gave up 2% to close at 7,241. My initial reaction after the close today was two-fold:

1) I wish I had cash in the MLH account to buy stocks next week.

2) Don't write anything about what happened today, just wait for the emails to flood my in box. Ooops, there they are...

So here I am, writing away, because I just can't stay quiet and I told my mom that I'd write something to try and explain the day. In an earlier post I commented on the fickle nature of investors who complained about so much that they were actually 'bearish' on both sides of the market. I took that to heart and bought a fund that shorts bonds. Today all that fear became reality and we saw a lot of investors washed out; not because the market is collapsing, but because they lack conviction, knowledge and patience. I'm sorry if you lost money today but I'm glad all those investors sold out and reset prices at a better level. The sellers are creating good entry points for the rest of us.

"The most foolish reason to sell stocks is because everyone is selling."

- Me

So What Happened?

Interest rates have been going up a little quicker than investors would like and today was the straw that broke the proverbial camels back when rates got up to 2.87% and closed at 2.84%. The interest rate spike and a 300 point drop in the DOW happened before I had my first cup of coffee, in fact I was still in bed.

The next blow in our Down DOW Triffecta was the release of the infamous Nunes Memo. The DOW found its way down about 400 points on this news.

Finally we got horrible news, we added another 200,000 jobs in January and wages grew, yes grew by 2.9% from the previous year. That's the fastest pace of wage growth since 2009! Horrible, just horrible news....right?

Let's Put This In Perspective

Interest rates at 2.84% is really frigin' low. The only reason investors are scarred about rising rates is that they bought a TON of bonds at much lower rates. Every time interest rates tick up bond holders lose more money. Bond holders' first reaction will be to freak out, but eventually they have to put that money somewhere, and I predict many of them will get pragmatic and choose stocks over the mattress. The sell off today is not about interest rates, it's about fear.

I realize that geo-politics plays a role in investing, but seriously, even if there are resignations, firings and general political turmoil over this memo, does it really impact how many semi-conductor machines Lam Research makes, or how many Big Mac McDonald's sells? Of course not, this is simply investors looking for reasons to support their negative bias.

The news triggered fear and it triggered the algo's. The algo's are those computer trading algorithms that make split second decisions to sell or buy based on news and economic data; assuming they're programmed correctly. Much of the selling today was made by retail investors and algo's; the smart money sat on the sidelines and enjoyed the show.

Up until today the general noise on the street was, 'we need wage growth, where's the wage growth. We need interest rates to go up, why doesn't the Fed raise rates so banks can make money and lend more. Why can't the Fed get inflation up, we need inflation at 2% to grow the economy.' Today we got the news that confirmed all of these things are happening and that they are happening at a pace that we can all digest. But instead of being thrilled by our own success investors flipped out and the news is now filled with stories about how nervous investors are about rates rising and inflation growing. You can't have it both ways and be a bear on both sides of the trade. Even the home builders (KB Homes, DR Horton, etc) were down 3+% today on the news that interest rates are up. Take a look at rates for a 30 year mortgage hovering around 4-4.25%; I think if you really want to buy a home these rates are still very attractive. Let's don't get too carried away. Today was not about interest rates.

Is This The Big One?

No. Today was normal, needed and it will happen again. Keep in mind that -666 points in 1990 would have been a significant crash, today with the DOW just below 26,000 it's a minor pull back. Today's sell of amounted to a 2.5% drop in the DOW and a 2% drop in the S&P 500 and NASDAQ. Yes today was bad and a lot of people saw a lot of money washed out of their accounts; if they sold. Those that held on to their stocks will be rewarded. So let's create a bullet list to add some clarity to where we are:

  • A correction is a 10% drop from the 52-week high.

  • A crash is a 10% or greater drop in one day.

  • A bear market is when the market is down 20% from it's 52-week high.

  • Crashes and bear markets don't cause recessions, but recessions often follow these events. Recessions are triggered mainly by a lack of confidence in the economy and the Fed raising interest rates too quickly to cool down a hot economy.

  • There is nothing frightening in the economy, synchronized global growth is still on track.

  • The fear of long term rates inverting has been removed; long term rates are rising, short term rates are holding, historically this has been a good thing.

  • The market isn't fragile, but some investors are, don't be one of them.

  • Higher interest rates signify faster economic growth. Be happy, rates are still really low.

  • The 35-year long Bond Bull market is over, that money will flow to stocks.

Why Didn't Anyone See This Coming?

Well the analysts all raised their price targets last week, surely they would have seen it coming, they are the pros.

I got asked this question today and I said, "anyone who took the time to look saw it coming. It's like looking at the gas gauge in your car and asking why you're out of gas when the needle is on E". Did I write about it, NO! I have no interest in throwing fear into the mix, besides there are plenty of prognosticators out there making all sorts of wild predictions, nobody needs my voice competing for attention.

Here's How To Look

Below is a chart of the DOW from 1985 to today. Below the DOW chart is the RSI. The RSI is the Relative Strength Index. The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security, or in this case the DOW Index. Anything above the horizontal green line indicates and 'Over-Bought' condition. Anything below the Red line indicates an 'Over-Sold' condition. Above the green line stocks are expensive, below the red line stocks are cheap. Notice that since 1985 we have only been above the green line three times and below the red line only once. In February 2009 the RSI dropped below the red line signaling the end of The Great Recession following the financial crisis. Here are the three events where we peaked.

1) Just before Black Monday in October 1987 (far left side of the chart).

2) In the 1990's during the DOT COM rally.

3) Now, since September 2017, (far right side of the chart).

The most important thing is to recognize this event for the incredible opportunity that it is. Stocks are going on sale, and they will get cheaper. The biggest difference between now and the last two times this has happened is that it's happening with lots of reasons to be optimistic. Rates are low, credit is flowing, growth is still strong, the dollar is weak which makes exports more attractive, we're manufacturing more now then we were last year or the year before that, investors are in the market and there is still lots more money on the sidelines looking for places to invest. Corporate earnings are strong, taxes were lowered, corporations are putting their cash to work. Apple was down over 4% today on what I thought was fairly good news after their earnings call. Apple is down over 10% from it's 52-week high; would I buy it here, yes, a little bit, and I'd buy more as it comes down because Apple CEO Tim Cook has already told us that they will be buying back over $120 Billion dollars of it's own stock. That's an investor with $258 Billion dollars in cash telling you they are going to compete for shares with you. Yes, buy Apple when it's cheap and hold it forever.

The economic strength we see globally wasn't there in the previous two peaks and drops. Could we experience another major correction or crash? Yes, it's inevitable that eventually we will, but this isn't the time to create our own crash out of nothing more than fear of being fearful.

Take a break, enjoy the Super Bowl, go do whatever it is you like to do to relax over the weekend. Take a little time to review your stocks and see which ones you really like where you can add a few shares next week. Take a fresh look at those companies you always wanted to buy but didn't and see which ones are on sale. Do a little hedging against bonds, notice that our shares of the TBT which shorts long term bonds is up 1.75% today and was up over 1% yesterday. That's our hedge against bonds. Diversify to have a little money invested in several sectors (industrial's, defense, healthcare, technology, consumer discretionary). If you have too much in REITS and utilities, consider re-balancing a little. Interest rates are going up, by default REIT's and Utilities won't fair as well. Trim (don't sell off) a few winners to raise cash, you might want to trim a few losers as well if your positions are too large.

There's a lot to be happy about, don't let other peoples fear influence your investment decisions.

As Always

Stay Invested

Clay Baker

Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved