Fast Moving Market

This was an explosive week for stocks; Especially for August. Volatility returned with a vengeance. August is always thinly traded, since it’s generally vacation time around the country, so the low volume definitely contributed to the increased volatility. Wednesday started off as one of the worst trading days on the year. Stocks sold off big time on concerns about systemic risk from the crisis in Turkey spilling into Europe and beyond. Things turned around midday with rumors circulating that trade talks with China were back on the table. It was later confirmed that Chinese leaders will travel to Washington next week. Thursday brought one of the best days on the year for stocks, completely erasing Wednesday’s losses and momentum kept surging into the weekend.

The S&P 500 is back near the all-time highs from January. But the DOW was the undisputed leader this week, this month and the last couple of months. Thursday was a DOW day. It was the best day for the DOW since April. Remember, the Dow Jones Industrial Average is price weighted, so when a high-priced Dow stock rallies, it has a huge impact on the overall index. Apple, Wal-Mart and Boeing were big drivers of the DOW. Something of a trend change has been the recent weakness in Tech. The Tech-heavy NASDAQ was a laggard again this week.

Strength continues to rotate within the Stock Market. Slow growing and perhaps even boring Consumer Staples are up 10% since May, while the overall Market is up just 4%. Tech, the largest weighted sector, is up just 3% during this stretch. This indicates a more defensive positioning in place, but it’s also a rotation from areas that have done well for a while into areas that have not. Regardless, the Market likes the prospects of renewed talks with China on trade. A possible summit between President Trump and President Xi is reportedly in the works for November. There are also signs that a deal with Mexico could be near. A thawing of the trade war would be very positive.

This new volatility is whipping around investors and bringing back concerns of a Market top and a looming crash. Sharp selloffs will do that. Generally, when the herd gets concerned, it is a good sign for more gains ahead. The herd is often wrong. Excessively bullish sentiment is seen at Market tops while extreme pessimism has been recorded at bottoms. Investor sentiment can be a very useful contrarian indicator, as most investors chase performance by buying high, and get spooked out of positions by selling low. It’s the complete opposite of what investors are supposed to do. Right now, the level of optimism is below average, and nowhere near extreme. This is one of many indicators suggesting further gains are still ahead. Earnings growth is the most important, and it has accelerated this year.

Also of note this week was the consideration of adjusting Corporate America earnings schedules. There is new talk of limiting earnings reports to twice per year rather than quarterly. There has been tremendous criticism, which I completely understand and share, that there is too much short-term focus on Wall Street. A Short earnings reporting cycle doesn’t necessarily allow for longer-term thinking and strategies. This is bringing out a heated debate again. Increased transparency and access to information is essential for free markets. The issue is not about the constant flow of information. The issue is more about the short-term focus and short-term milestones for management compensation. Long-term investing has proven its effectiveness over the years. Getting rid of some of the short-term noise would seemingly reduce the excess volatility and smooth out performance and returns. This could result in greater investor confidence. Switching to semi-annual earnings reporting won’t necessarily accomplish this. But at least the conversation is taking place. Good things can come from conversations and debate. I will be fascinated to see where this one goes.

Have a nice weekend. We’ll be back, dark and early on Monday.


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