August has seen a massive pick up in volatility, and we are watching two key price levels to help us guide portfolios. After all, price is the single most important factor when making investment decisions.
Two weeks ago (on August 7), as the Dow declined 800 points we published our ‘Insights’, titled “Central Bank Steamroller“, where we brought attention to 1) the increased volatility, but also 2) the things we can and cannot control in the markets.
“Focus instead on what you can control”, was the takeaway. The two most important factors you can control when making an investment are the price you pay and the price you receive when you sell.
Price matters. After all, price is what actually makes you any money or not.
Earnings, tariffs, inverted yield curves, the Fed, recession probabilities, negative interest rates, and GDP all have influences on the investment landscape. But these do not directly influence your investment portfolio. You can be 100% accurate in predicting every economic indicator, but if the price you sell is lower than the price you paid, then you still lost money. Everything else is, in a way, largely irrelevant. Would you rather be right or make money? We know our answer.
Because price is the primary determinant of whether our clients make money or not, we focus a great deal of our efforts on charts. To us, charts are exquisitely beautiful. They contain the collective wisdom of every investor in that particular market. Charts tell us without bias what price is actually doing. And price is always right.
Price doesn’t care what any of us think. It is what it is. Period. Too many investors and portfolio managers try to argue with price, and attempt to defend their own perception of what they think prices should be. This is the ultimate waste of time and effort. Worst of all, this type of thinking leads to the single biggest reason portfolios lose value: trying to justify why the market is wrong and you are right.
We purposely try to ignore much of the commentary around things that are out of our control. If information is included in commentary, do we really think that millions of market participants are collectively ignoring that information? The reality is that information is either already factored into the current price, or that the information simply doesn’t matter. Either way, price already has encountered, dissected, and adjusted for the information in question.
The chart below shows where price currently is with our annotations of where we would be a further buyer and/or a further seller. With price still stuck in between these two levels, we are remaining in a “wait and see mode”. Not making a decision is also a decision and at certain times it makes more sense to us from a reward to risk perspective to allow the market to continue to disseminate information. The choppy action of the last two weeks reveals the market is still digesting the (6.5%) move down in price off the July highs.
Once this initial decline culminated with August 5th’s 800 point Dow down day, the market recovered in a typical fashion, by bouncing back to roughly the midpoint of the move down, which also happened to be where a couple of key moving averages were hanging out.
Price remains near that level, and this is normal in a free market with buyers and sellers both competing for their own self interests. It makes sense that when the dust has settled price finds itself about midway between its recent highs and its recent lows as well as at the same level as the average price over the past 50 and 60 days. This is the average price and where buyers and sellers have settled. But, now what?
That 50% retracement area at 2940 on the S&P 500 Index acted as resistance, and we saw a second 800 point Dow down day in as many weeks on Wednesday, August 14. Notice also Friday (August 16th) of that week and this most recent Monday (August 19th) took prices back up to that level of resistance (are you sensing a pattern here?), where thus far resistance has once again held. Three times in the last 3 weeks the 2940 level has been tested with thus far an inability to overcome it. In plain English: Sellers are winning over the buyers right now.
An interesting aspect is this all looks very similar to what the market did back in May, when it also fell, bounced, and then fell again. This is one reason why we think it is very important for the market to hold its recent lows. Otherwise it risks, at a minimum, a May redux with another equal sized move lower from here. This is why we have identified 2820 as a line in the sand for us.
In the longer term chart below, we also are seeing some important developments. The market broke to new all time highs in June and July, but has now reversed, breaking below the levels of the former all time high reached in September 2018 as well as April 2019.
With price now back below those previous all time highs, the potential is now there for the entire summer move to be considered a “false breakout”, a bearish development in which the markets “trick” long term investors into buying the new highs, only to flip the script and trap them in losing positions. Even worse, the recent bounce in the markets that met resistance at the 50 and 60 day moving averages also met resistance of the two former all time highs near 2940.
Investors who bought in June or July are now underwater and trapped there with losses unless price can retake that former support that is now resistance (~2940).
To us, it is very important the market holds its 200 day moving average and red trendlines shown in both charts above. The short term trend has already turned down, but a break of the intermediate term support would further increase the probability that a larger selloff is in the works. If the market moves below its 200 day moving average for example, chances increase that we could see a decline similar to the October-December 2018 pullback, and ultimately see prices fall 20-30% from the peak in July.
We are prepared for whatever scenario the market throws at us and we have already significantly increased our cash positions during the 5% pullback we have seen in August. We are prepared to continue that move into cash if $2820 breaks.
In the more bullish scenario, we have identified some individual stocks and ETFs to add to our client portfolios in the event the market has once again found a bottom and wants to move higher. A break above $2940, as the first chart calls out, would help identify the more bullish scenario.
Until either one of these price zones gives way, we don’t see any reason to be impatient right now. The safety that cash has provided our clients during multiple 800 point Dow down days has a very real and beneficial effect on volatility and returns for our clients.
As the late Tom Petty so eloquently put it, “Waiting may be the hardest part”, but during volatile times such as these, it’s much nicer to do that waiting while in cash rather than other instruments froth with turbulence and deviations.
When it comes to investing, price is what matters most. Price is what makes your account go up and it is what makes your account go down. Having a plan and process around price makes sense to us. Hopefully it makes sense to you too!
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Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The investments and investment strategies identified herein may not be suitable for all investors. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and objectives. *The information contained herein has been obtained from sources that are believed to be reliable. However, IronBridge does not independently verify the accuracy of this information and makes no representations as to its accuracy or completeness. Disclaimer This presentation is for informational purposes only. All opinions and estimates constitute our judgment as of the date of this communication and are subject to change without notice. > Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The investments and investment strategies identified herein may not be suitable for all investors. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and objectives. *The information contained herein has been obtained from sources that are believed to be reliable. However, IronBridge does not independently verify the accuracy of this information and makes no representations as to its accuracy or completeness.