October 12, 2014
Weekly Market Outlook
By Keith Schneider
This week’s price action in the equity markets is enough to rekindle fond memories of the 1987 crash when the stock market dropped a bit, like 22 standard deviations. Mathematically speaking that is about 20 times the normal daily trading range, which is about plus or minus 1%. This type of event should not have occurred in eons but did. Being the sentimental type, I do try to be a good friend and husband, anniversaries and birthdays are important to remember. October, while generally a decent month for the markets, however when it’s bad, is very bad. Take for instance Oct 29, 1929, or October 19, 1987. Well, you get the picture. In 1982, the Dow took out its all time high which was about 1050 at the time and ran up to 2700 before it crashed. That’s about a gain of 257%. Currently the recent gain from the lows in 2009 after the financial crises to the highs put in this September is about 260% give or take. Both of these extended moves have taken about 5 years. In 1987, then treasury secretary James Baker threatened to devalue the dollar in order to cure the trade deficit and is often credited for the plunge. Recent Hawkish talk and rate raising by certain Fed board members might have spooked the markets, while growth remains tepid in many areas of the economy. As we have pointed out many time this year, small caps have been topping out and badly lagging all the other indexes which has made us very cautious and caused us to move to mostly cash in our active portfolios and almost 45% cash or US bonds in our position trades.
There are some positives, such as seasonal tendencies where October thru the end of the year are particularly strong periods and the presidential cycle/ mid-term elections cycles as well. The market breadth is oversold and sentiment readings are at very low levels as well, as the market tests 200 day moving averages and important support levels. However, oversold can get more oversold and the tape tells all.
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