Stocks and markets need to take breathers every now and then. When I think of great stocks, they often pause and gather strength before spring-boarding higher. Sometimes the lags are brief. Other times they are longer.
The earth itself had a similar lag period in its own evolution. Activity stalled for about a billion years, so scientists dubbed it "the boring billion." Earth became a slimy, near-static world of algae and microbes. Then boom! – evolution exploded and flourished. I think we are in such a period for the U.S. stock market.
August has lived up to my expectations of a bumpy unpredictable ride. Bad and good news seem to come from nowhere, and the trajectory of the market is hard to see in the immediate term. This is a lot like what I am seeing with this unprecedented storm. As I write this, Hurricane Dorian is bearing down and coming uncomfortably close to where I live.
But uncertainty and volatility can never be removed from life. Nor can they be removed from markets. The best we can hope for is to make sense from it and try to adjust for when some level of predictability returns. So, as we bid farewell to a volatile August and welcome a potentially volatile September, where do we stand?
First off, the major slide of selling has slowed down into a light-volume Labor Day weekend. The good news is that the market has been rallying. The bad news is that it's been on very low volume. That means it should be treated as suspect. Volume determines what's really happening in markets. Beware of the head fake.
The low-volume week brought us low signal counts. The distribution of buying and selling was still in favor of selling, while utilities and staples saw a spike in their buying. This is still defensive action.
The other thing to make note of is that the Mapsignals Big Money Index keeps falling. That's a ratio of buying to selling. When buying dries up and selling picks up, that index falls. When it falls below 45% we typically see lower market prices ahead. This means "caution." That's the bad news: we may be in for more bumps and discomfort.
However, the good news is that, when we see a drop below 45%, it typically means we are close to the end of selling. It's like the seventh inning: the game is nearly over, but there's a lot of game left to play.
But here's the thing: great stocks go up over time. It's just an observable fact. The trick is to find the best ones that big money is pouring into. Zero in on those and get positioned. Naturally, when they go on sale, it is a great time to pounce.
However, fear often gets in the way: "it could go lower" … "I could lose money." No one likes to lose or feel danger, but losing is a part of winning. There are countless stories of failure preceding greatness. Athletes, playwrights, composers, creators, politicians, and every walk of life is littered with stories of failure.
Michael Jordan said, "I have failed time and time again, and that is why I succeed." Colin Powell said, "There are no secrets to success. It is the result of preparation, hard work, and learning from failure." Steve Jobs said, "If you're not willing to fail, you're not going to get very far."
As the market bobs and weaves, we need to focus on the data. Earnings reports were very good for the second quarter. Rates are low and likely going lower. Europe has political headwinds causing capital flight out of equities there. Latin America is rife with issues. China is reporting a slowing economy.
While all of this is doom and gloom, the bright spot is the United States. We are the safe haven in a world of uncertainty. And as the dividend yield of the S&P 500 yields more than the U.S. 30-year bond before taxes, the after-tax treatment makes owning stocks far more compelling.
This means that, if we do see a market dip, you should have your shopping list ready. When you've had your eye on a coat, or a car, or a computer, and there's a price slash, you wouldn't hesitate to dive in and seize the opportunity. But when stocks go on sale, people question why and wonder how low prices can go.
I suggest that you research your stock wish-list and get it honed and ready. The market is providing and will continue to provide opportunities to take advantage. Our data suggest that an opportunity is lining up, and should it come, it's a great chance to grab some stocks. Should it not come, it means that logic is starting to prevail and investors are starting to realize that there is no better place to put your money than U.S. stocks.
So, as I hunker down and prepare to ride out whatever Hurricane Dorian brings me, I am thinking about when the hurricanes rip through markets. In the past, each time has invariably proven to be a great buying opportunity. It almost makes you want to see some red.
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.