Episode 216: Market Vacation

In this week’s episode, David rides solo and provides an important update after seeing the start of August off to its worst start since 2002. With plenty of outside uncertainty (assassination attempts, Presidents removing themselves from consideration, Crowdstrike server outages, Venezuela uprising) it is important to focus on price. In this episode, David highlights the current market environment including important market levels to pay attention to.

Transcript

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Welcome back to the weekly trend podcast. Today is Friday, August 2nd, 2024. I'm writing solo today. My name is David Zierling. Ian McMillan is on vacation. Dan and Kevin are working hard for our clients, but I figured it was important to provide an update in this week's episode, specifically considering the volatility that we've seen this week as we enter into August. It's not necessarily a surprise considering the seasonality we often see in August. In election years, typically August is a little better than normal. This being a down August, you know, one of the most aggressive downsides to August actually since 2020, or 2002, so we haven't seen this type of move. The first two days of August, pretty normal from the standpoint of normal volatility in a market. Markets are by definition somewhat efficient. They are a weighing machine and therefore there is some inefficiency that goes on with price discovery when we're looking out six to 18 months. But I figured it was important to provide an update considering what we've seen the last two weeks outside of price. The noise that is upon us, whether you're talking about an assassination attempt. On a presidential candidate and all the very odd things that surround that the CrowdStrike servers being down five days later and all the very odd things that surround it, president biting, removing himself from the nomination and all the very odd things that surround that process. And now we have a Venezuela uprising and all the very odd things that are surrounding it. So plenty of noise, but we like to focus on the signal price. And here we're in an environment where we're seeing a quick pullback. July itself from a S& P 500 standpoint, when we look at monthly information. So how did July look for the S& P 500? When we look at that information, it was barely green. When we look at small caps. They were the best performing area from a broad indice perspective. And so it was a very nice July that we saw, and here we're off to a very strong negative start for August. It's one of the interestingly, my family vacation that I take with my wife's side of the family is typically the first week in August. We didn't do that this year. We went during the week of July. And I actually prefer that because the first week in August has notoriously A very difficult week for the market August in general, you might remember last year, August was the start of a three month decline in the market. When we look at something like the S and P 500, we saw, you know, three months, August, September, and October in 2023 of a corrective period that set up one of the greatest moves we've seen in the top percentile of moves. And so it Well, it's not fun to have a two, what's really a two day move aggressively to the downside. We did see August, September and October of last year, minus 10 percent volatility is the price we pay to be involved in markets. Markets do not move in a straight line, but I'd like to remind everybody listening to this, the environment that we're in, for example, we still remain above all time highs and S& P 500. If you're listening to this, please feel free to drop us a link, and we'll see you on the Bye. Bye. That date back to 2021, early 2022, we have a rising 200 day, 100 day, and 50 day moving average in the S& P 500. You look at small caps using IWM, you have a rising 200 day moving average, a rising 100 day moving average, and a rising 50 day moving average. You look at the NASDAQ 100, which has all the big players in it. You have a rising 200 day, a rising 100 day, a rising 50 day moving average. You look at international stocks using VEU, you have a rising 200 day, a rising 100 day, a flat ish 50 day. When you look at emerging markets, kind of the most guilty of the party, but still, you have a rising 200 day, a rising 100 day, and a flat ish 50 day. So when we look at equities from a broad, broad perspective, This quick move down, what do I mean by a quick move down? Again, we're start to august since 2002 when we look at something like the S& P 500 In two days, we've moved about minus four percent, but markets Tend to do what market markets do, they oscillate, they move. We're down 6 percent from the peak in mid July, also matching seasonality. And we're still in an environment where we saw a type of breath rust that took place in the first part of July, which saw small caps move quite aggressively to the upside now, small gaps are back to a really important level at two 10. Two Oh eight on. Something using IWM back to its 50 day moving average. It makes sense that there has to be an auctioning process that takes here to pull the, what's called the point of value or the point of control higher. We have bullish percent sitting in X's, so we're sitting in midfield, the offense has the ball. Yes, we've had a quick couple day move down. In addition, we have the VIX, a volatility instrument stretched. You know, we're, we're, we're looking at a VIX that's sitting approximately at 26 currently to start the day. We are as high as 29. Those are levels that we haven't seen since March of 2023 and March of 2023 is basically when we saw the acceleration off of a cyclical bear. Market that took place from early 22 into the fourth quarter of 23, or I'm sorry, into the, into the fourth quarter of 2022. And then, then sprung board. There was a springboard out of that in spring of 2023. And the VIX is at those levels right now. So you ask yourself the backdrop, the assassination attempt a, a candidate stepping down, an incumbent stepping down. We talked about last week with Ian, the seasonality difference between. A presidential election that has an incumbent and a presidential election that's wide open. So a presidential election that's wide open typically sees in a week, August, September and October. We could be experiencing that. Time will tell. We don't know. But I will tell you that when John Templeton says. Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. Pretty sure we're not at euphoria. Not even sure we're at optimism. I would say there's a lot of skepticism in this market considering What's the Fed going to do? The odds of a, a rate in September, the back, the political backdrop, the earning season that we're heading into plenty of uncertainty, but it's why we use price at client first. It's why the adaptive process uses price because we want to identify where have buyers and sellers interacted before. When we see these type of pullbacks, which are perfectly normal within uptrends, and again, we have uptrends as defined by 200 day moving averages all around us. We still have higher highs and higher lows all around us. We still have a breath environment that's at a reset level, so we're not at extreme breath levels. We're at middle of the range breath levels. And so here we are, we can use price to identify, okay, where does the thesis that this is just a normal pullback in a bull market, where is that thesis wrong? Right? Cause we don't, we don't want to marry our opinions, right? I married my wife. I didn't marry my opinions. We want to have an opinion, but loosely held based on the information at hand. And so for example, if the S and P 500 is going to be below 4, 990 below a 200 day moving average, Below an important low that goes back to April of 2024. Well, yes, we want to sit up and take notice. And some might say, well, Dave, you know, you're talking about another 6 percent to the downside. Yes. These are normal market environments. So we don't, markets don't move in a straight line. I wish they did. It'd make it easier for retirees, but the reason why we're involved in markets is there's a trade off between volatility and return when we know that the likelihood. Of a drawdown mid year or sometime during the year for something like the S& P 500 is anywhere between 10 and 15 Yet your average return is nine percent We actually know that you're you're paying a volatility premium to be involved in markets, especially whether they're in uptrends So while we're going to see some volatility here in august it appears it would be a perfect normal digestion period considering the move, the historic move that we've seen since late October, 2023 through now. Keep in mind, October of 2023, late October through mid July, the S& P 500 was up 37%. That is one of the best nine month periods that we've experienced in a market. And so if we're going to move in a 10 percent range. And bring in an auction process bring in buyers and sellers to see Where the actual level of price should be sitting that is perfectly normal And so we want to pay attention to important levels, you know when we look at small caps using iwm We should be looking at the 208 210 level. We're currently sitting there currently sitting on a rising 50 day This is an important horizontal level that we saw buyers push price through previously. Will it hold? That will be information. S& P 500, 5220, also a very important level. That's something that was the prior high in April. Was tested in may and would be something that you'd like to see buyers show up at that level if they don't Okay, maybe the risk in this market is greater than was previously foreseen open to that when we look at the nasdaq using qqq 445 important level we're right there right now when we look at emerging markets and you look at the 4150 level which is a horizontal level where buyers and sellers have interacted going back You To the beginning of 2023. These are the things we want to pay attention to, to see has risk increased in this market. And some interesting relationships, you know, we're seeing treasuries move higher. And again, this goes back to the bond market sets rates. It's not the other way around. It's not the fed setting rates. It's the bond market setting rates. And here we have. The, you know, treasury instrument TLT, you look at the broad AGG, this is a move that we've seen the past week that's indicating a rate of change in rates. And sometimes markets struggle with a rate of change, whatever that direction is. But when you look at AGG, up against a really important horizontal level at 100, when you think about that versus equities, and where you see all these important levels that we're at right now in equities, this is a really dangerous spot for investors who think they can get queued and get short. But time will tell. These previous levels that I identified, they could break, who knows. But you might remember from our episode back in March, that by the freaking dip has not become the mantra. There is a lot of fear, even with this pullback that we've seen, there's a lot of fear. And, and quite frankly, I get it, right? The, the things that I mentioned is outside noise before, I mean, it is unnerving that you have an assassination attempt on a presidential candidate and Google wipes the episode as if it didn't happen from its search engine. That is problematic. And those are both factual statements. When you, it becomes aware that the local law enforcement wasn't communicating with the secret service on that day. There is some unnervingness around that information. I'm not here to tell you that that's not true, but I am here to tell you that the market is extremely good at pricing in information. And this recent pullback that we've seen, if it turns into more, we will know. Because mathematically speaking, you cannot go lower in the S& P 500 unless you go through 5221st. You cannot go lower in the NASDAQ 100 unless you go through 445. You cannot go lower in emerging markets unless you're below 41. 50. We may break those levels, and until we do, we continue to see a very strong uptrend, and if we do break below those levels, there's two other theses that exist. That the pullback will be deeper than previously thought, or it's the beginning of a new downtrend. So, time will tell August off to a rough start but perfectly normal from a seasonal perspective. We want to keep those things in mind. You know, when we look, it wasn't that long ago that we look back at July, the Russell 2000 was up more than 10%. And that's the only, that's the 21st time that's ever happened according to Ryan Dietrich. And when you look at the other times that's happened, it has strong forward returns. They're perfectly normal. And up, up a year later, about 15%, 16 percent on average. So it's interesting to watch the sentiment around this, that this pullback might make some people nervous. We look at price, we look at those price levels that we identified before, and we want to make sure that we're staying disciplined to the process. And making sure that we're taking all that information. And just for context, for the aggressiveness of this type of move down, it's, it's really, we're down 6 percent in small caps on the week. And that happened basically these last two days, yesterday and today. When you look at something like. Industrials or, or maybe even you just want to look at the S and P 500. It's it's down about 4 percent in a matter of two days. That's that increased volatility. There's no such thing as a flight without turbulence. There's no such thing as a highway without a pothole. There are times when a market will have pullbacks and that's perfectly normal. Now it's about paying attention to, is this something bigger than a normal pullback and those levels that I highlighted before, we perfectly good things to look at, but from a breadth perspective, we still have rising 200 days all over the place, rising 100 days all over the place. We haven't have most 50 days that are rising. We have a bullish percent that's at midfield and offense has the ball. Now maybe today's. Potential damage the market will flip that to owes that will be determined at the close But here we continue to see a market that has health behind it. There's been some strength out of financials recently We'll see if that holds And small caps recently. We'll see if that holds but right now we are in price discovery mode Trying to find basically if you think about what happened with IWM With small caps in july, it's information that we cleared the 210 level. We're back to that level to see are the buyers there for real because this is a huge level that goes back to 2021 and 2022. In fact, this 210 level that we're sitting at currently was touched one, two, three, four, five, six times. In 2021, and then again from the underside in 2022. And then again, in the beginning of 24, we cleared it recently. And now we've checked back to that area. This is that auctioning process where the market is saying, are you guys for real? Is the demand from institutions real enough to drive prices higher from here? And with an uptrend on our hands, the thesis is that yes, buyers should show up here. And it would be tremendous information. It doesn't. And so that's that thinking in scientific terms, using Bayesian statistics, the most recent information is the most important. If we cannot hold 210 in IWM, if we cannot hold important horizontal levels in the S& P 500, that will be information that we should be paying attention to. At this point, we're not seeing it. Fully aware that we have a yield curve that is. In more modern history, one of concern, but typically when people talk about the yield curve, they're talking about what it looks like the last four years. However, I'd make the argument that if we're a rising market environment, meaning a secular rise, so we're talking about decades of rising rates. That the yield curve might look different in that environment because we haven't seen that since the pre 1970s So we'll see time will tell we pay attention to these levels. Of course for our clients. We'll be making adjustments It's why we don't just Sit forever if we're breaking below 200 day moving averages, which we are not Obviously we'll be taking Protective measures for our clients and with that being up against the end of our time You're probably sick of hearing me talk. I do want to highlight the supporter of this podcast, which is the adaptive select etf ADPV, which is listed on the NYSE, which helps investors access to the most prevalent factors in markets, momentum, and relative strength. Using proprietary identification methods, the Adaptive Select ETF attempts to own the strongest 25 large cap stocks when the market is in an uptrend. And since not all market environments are the same, Adaptive Select seeks to prevent extended declines by moving to short term treasury bills and cash during long term market downtrends. Investors can find out more, including how to invest in ADPV by visiting ADPVETF. com or calling 1 833 880 5200. Investing involves risk, including possible loss of principal. Distributed by Quasar Distributors LLC. I appreciate you guys tuning in. It was important to provide an update considering the outside noise that's going on. Very real but at the same time giving context on where we are in the market. And we still have rising 200 days of information from the past. We still have a breath environment that's positive. We do have levels that are pre identified if this continues to deteriorate. August is notoriously weak we could see a weak August through October if the market is returning to a seasonality that looks more like a wide open race between two open candidates rather than an incumbent. So we'll see. Time will tell. is this an August through October of 2023? Or is this a sideways range that's just digesting a really great nine months that we saw all the way through July? So, thank you for listening to this. If you enjoyed it, please share with others, give us a high ranking. We really appreciate it. Have a great weekend.