I am happy to present this week’s market commentary from FormulaFolio Investments. The goal is to give our clients and friends a simple way to see everything they need to know about the financial markets on a weekly basis, in 5 minutes or less. After all, finances should be simple, not complicated.
Markets finished last week up significantly, breaking through some important resistance levels. While the past couple months presented some scares, it looks like we could be breaking out into new all-time high territory soon.
Lesson to be learned: 10% drops are not moments to panic in. Rather, they are more often than not moments of opportunity.
FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear). In future posts I’ll write more about how these indicators are built and why we feel they are important.
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull / Bear indicator we want it to be at least 67% bullish. When those two things occur our research shows market performance is strongest and least volatile.
There were no changes to our economic or Bull/Bear indicators this past week. They remain positive on the economic front but negative on the stock market front. Historically, this means our models think there is a higher likelihood of stock market declines in the near term future (think <18 months).
The market drop from its May highs had a lot of us worried, myself included. But it really does look like it was just a very short and mild correction. You can see in the below chart that we broke out in a very positive way from the downtrend, including a breakout above a rising wedge pattern.
If this is all greek to you, no worries, it is for most. Just know this:
Everyone was worried about earnings, then companies like Microsoft and Amazon blew their estimates out of the water. Investors were worried about China, and they dropped interest rates for the 4th time this year to help pick their economy back up. And finally, investors were worried about the US Federal Reserve raising interest rates, which now looks highly un-probable.
So all the worry was for naught. At least this time around. There will certainly be a bear market in the future, perhaps the near future (as in next 12 months), but it doesn’t look to be happening now.
As investors, we should still be cautious, but cautiously optimistic. Here at FormulaFolios we are again in a bull market bias, with only modest conservative positions planned into November. This could change in the next week if the market can’t hold on to this rally, but I think it will, and our models will confirm that in the next 5 business days.
More to come soon. Stay tuned.
Phil Calandra and Jason Wenk