Below is a snapshot of last week’s market performance and what to watch in the week ahead from Chadd Mason, Cabana CEO and co-founder.
U.S. equity markets ended last week down despite a rally mid-week. As of Friday, the S&P 500 was down 1.2%, the Dow was down 2.3% and the Nasdaq was down 1.9% for the week. The S&P and Nasdaq remain below their 200-day moving averages, while the Dow managed to stay just above it. Defensive equity sectors such as consumer staples, healthcare and utilities continue to outperform cyclical sectors such as consumer discretionary and industIARls. Technology remains the weakest of the bunch after being a leader over the past eighteen months. Small caps are underperforming large caps. Interest rates have pulled back in response to equity weakness and are now touching 3.10 on the 10-Year Treasury Note. This gives support to bonds and other interest rate sensitive assets, such as REITs and dividend payers. International equity markets remain weak, as they have all year. In sum, the only factors we have in our favor, are seasonality (November and December are traditionally strong months for the stock market) and a potential “reverse head and shoulders pattern” in the S&P 500. A “reverse head and shoulders pattern” is a bullish technical price pattern, which could be developing. We would need to see the S&P close above $282 for it to be confirmed. We are a long way from there as we closed last week at $274. I have done some research on intermarket relationships prior to entering bear markets and came upon some similarities between what has occurred in 2018 and what occurred in 1990. Early in 1990, bond prices turned down sharply in response to rapidly rising rates. This created a negative divergence between stocks and bonds and was a precursor to falling equity markets later in the year when the Dow fell 17%. Additionally, following a worldwide selloff in equities early in the year, U.S. equities rebounded to new highs while the rest of the world failed to do so. The U.S. became the only market with its head above water. That qualified as a “global equity divergence” and was not a good sign. This year we have witnessed these exact scenarios. I have commented on these conditions many times over the past few months and things have not improved. The one difference in the set up today, is that in 1990 (and also leading up to the 1987 crash) the cause of the rising interest rates was rising commodity prices and a weak U.S. dollar. This year, we have seen the opposite. Commodity prices are in check and the U.S. dollar is strong. The cause of the rising rates currently is normalization of monetary policy in response to improving economic conditions in the U.S. Whether this underlying catalyst makes things different remains to be seen. We remain cautiously bullish and defensive.
This mateIARl is prepared by Cabana, LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this mateIARl are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.
This mateIARl may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this mateIARl is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.