“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Market reversals are a fact of life for investors. Whether financial markets are trending higher or lower, there will always be a reversal at some point. The most relevant aspects of the reversal are the degree and the length of the change in direction. In other words, how far and how long the reversal travels away from the primary trend. This is vital information for investment advisors, especially those who rely upon technical analysis when making portfolio allocation decisions. Foy Financial Services is in that camp. In the beginning and up front, we declare that we utilize trend-following asset allocation processes in managing investment portfolios.
We do this because it has been proven to me repeatedly that trend-following is without a doubt the most efficient means of asset allocation. The catch is, and there is always a catch, the advisor has to pay very close attention to the trends. That may sound simple, but it’s not. It’s like saying that the pilot has to pay very close attention to the planes they fly, or the surgeon has to pay very close attention to patients during surgery. Knowledge and experience are invaluable. We will not invest in any securities unless we can determine and monitor their trends. It is just that important to us.
That being said, there are many types of market reversals. Some naturally come and go within the context of an ongoing trend. Others require more attention, and in some cases, more of a response. There are market reversals within the context of both uptrends and downtrends. At Foy Financial Services we do not attempt to make money by participating in downtrends, using methods such as shorting securities, or using options or futures to profit from declining markets. Rather, we chose to participate in uptrends, and we work to determine which securities can most effectively assist portfolios in achieving those objectives.
The month of September is a particularly interesting time for trend-followers. Historically, it is the 12th worst performing month of the year. There are logical, predictable, seasonal, and even political reasons for its poor performance. Most importantly, institutional investors typically ‘cull the herd’ in September. This includes dressing up their managed portfolios for the all-important 4th quarter and year end reporting period. Coincidentally, their performances for these periods also play a huge part in determining their quarterly and year-end bonuses. This might sound trivial, but as my grandmother used to say, “If you want to understand why something is happening, follow the money.” It is well-known that the 4th quarter is historically the best performing quarter of the year.
But why is September so interesting? Because not only do institutional investors tip their hands on what they are willing to sell, they expose what they want to hold. The ‘how far’ and ‘how long’ of the trend reversals for individual sectors are very telling, as well as how fast, and how hard they repurchase certain sectors when the trend reversal is itself reversing. A great example this September is how the energy sector is participating in the ongoing correction. MTD, the S&P 500 Index has declined -5.08%, and the NASDAQ Composite has declined -6.68%, as of yesterday. The S&P Composite Energy Sector Index has risen +4.42% MTD.
Yesterday was a market reversal day, to the upside, after a correction that has been in place all of September. The worst-performing equity sector indexes yesterday were defensive sectors. Utilities, real estate, consumer staples and health care indexes populated the bottom of my list of over 60 equity sector indexes. Energy sector indexes were the top four. If you were not a trend-follower, you may not know, or even care. But it is important to us. We believe that the examination of market reversals holds value. We also remember that one day does not a market make. But trends are built one day at a time, day by day.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
© 2023 Edward D. Foy. [email protected], www.foyfinancial.com.
Sources: StockCharts, Morningstar, Stock Trader’s Almanac.