Crossing the Lines

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

October has been like Tina Turner’s ‘Proud Mary.’ It started out nice and easy… then it finished rough. The first two weeks of the month the S&P 500 Index was up +0.99%. The Dow Jones Industrial Average was up +0.54%. The Russell 3000 Index was up +0.51%. The S&P MidCap and Small Cap Indexes had just had gentle bounces off the bottom of their trading ranges. The months of August and September had misbehaved, like they tend to do, but we were set up nicely for a historically good fourth quarter. Then it got rough. The last two weeks of October the S&P 500 Index fell -4.84%, the Dow Jones Industrial Average declined by -3.68%, and the Russell 3000 Index fell -4.91%. The S&P MidCap and SmallCap Indexes broke through the bottom of their trading ranges, falling by -4.73% and -3.93% respectively.

Important lines were crossed the past two weeks. In addition to breaks in the trading ranges of small and mid cap indexes, large cap indexes crossed below some very important lines. Last week the S&P 500 Index broke below it’s 200-day moving average, as well as an uptrend line dating back to the October 2022 market bottom. This is especially significant because large cap equities have been ‘running the show’ in 2023, and several of those stocks have broken their long-term moving averages as well. In fact, after the past two weeks, only 28% of the stocks in the S&P 500 are now trading above their 200-day moving averages.

Bond markets have been under pressure as they await the Federal Reserve’s decisions on future interest rates. Month-to-date the Bloomberg US Aggregate Bond Index is down -1.28% after declining -1.08% the past two weeks, and it is now down -2.48% YTD. Municipal bond indexes have been following suit. High yield bond indexes are still in positive territory YTD, and short term bond indexes have also been holding steady. Short term bonds, as well as floating rate bonds, have been safe havens thus far.

Our immediate reaction has been to reduce exposure to selected large cap sectors, especially in the technology sector. We have added positions in sectors which have historically performed better under similar market conditions, such as utilities and financial services.Additionally, where available, we have added a position in a gold fund. Gold funds have had their own headwind in the form of a strong U.S. dollar, but the combination of higher inflation and a tenuous equity market environment has been bolstering prices. Additional defensive action may be warranted as we monitor the degree and the length of this market reversal.

In last month’s Commentary we discussed market reversals in general, not knowing what was just around the corner. Changes in direction are a fact of life for investors. Professional investors such as institutional investors, and investment advisors such as Foy Financial, pay particular attention when long term trends and long term moving averages are crossed. In this case, they are crossing to the downside, which may be an indication that we are headed for more rough weather. Coupled with the negative price action in August and September, it is obvious that equity  markets are in a correction. The timing of the correction has not been very surprising, but its longevity has been notably persistent.

These are times well served by expanding your frame of reference. There are cyclical perspectives coming into play, including strong seasonal and political trends, which are historically positive for equities. Despite the recent negative developments, there is a lot of time left on the clock for 2023. We are watching several indicators, most notably the Volatility Index, which should provide additional information as we move into the fourth quarter. It appears that 2023 will be defined by the fourth quarter for both equity and bond markets.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2023 Edward D. Foy.  [email protected],

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.