Market Weakness

Since August, with the exception of a six-week period that ended earlier this week, the S&P has been trading below its negatively sloped 200-day moving average for the first time since 2011.  The 200-day moving average is a widely used method to define whether an index is in a downtrend or uptrend.  With this in mind, it would be easy to argue that the market has begun a downtrend.  Over the last 25 years, the market has performed poorly when below a negatively sloped 200-day moving average and vice versa. Since 1990, the S&P has increased almost 1000%.  Within that span, Investing only during periods when the S&P was below a downward sloping 200-day moving average would have resulted in a 75% LOSS of capital.  Currently, the market has just barely ticked into this territory, so it is quite possible that a “whipsaw” like 2011 occurs, but it is worth acknowledging this development.  MORE:  Are Stocks Headed For A Bear Market? 

Non-Farm Payrolls

Non-farm payrolls for October were much better than expected, coming in at 271,000 versus an expected 185,000.  This means that market was up today and that people were applauding the surprisingly strong economic data, right?  WRONG!  Conversely, the market digested it as a signal that the Fed will increase rates sooner rather than later, which is theoretically bad for most stocks.  Looking into the specifics, high-income stocks like REITS and Utilities were down the most, and Financials were relatively strong.  Further, the dollar moved strongly higher on this news, which is a negative for the materials and energy stocks.

Recent Market Action

It is widely said that the market hates uncertainty.  This time is no different.  Last week’s Fed decision (or lack thereof) has added additional uncertainty to the market.  While it may seem that keeping rates the same would be better for equities, it may be that raising rates on Thursday would have been good for the stock market because then at least market participants know what they are dealing with.  The chart below shows that the S&P 500 is down 4.3% from its peak on Thursday, which was the day of the Fed release:

You will undoubtedly hear on the news and read about how the Dow was down over 1,000 points at one point today, so I will not regurgitate that information.  What you might not read is that today was reminiscent of the 2011 “Flash Crash” for many stocks.  On the open, a number of well-known stocks dropped twenty percent or more.  Stocks like GE, Colgate-Palmolive, Boeing and Starbucks all experienced major, albeit brief, collapses.  Below is a one-year chart on Colgate-Palmolive.  Note today’s movement on the far right of the chart.  This stock went from mid-sixties to $50 and back to mid-sixties all by 9:36 am.  Now that this is the second “flash crash”, it appears to be a flaw in the market which has likely been exacerbated by automated and ETF trading.  It is hard to argue that the market is efficient and orderly when huge, usually non-volatile stocks can move up and down twenty percent in a five minute period.  Some illiquid ETFs were down as much as 40% this morning.  My guess is that like last time, many of these trades will be reversed by regulators. 

Elkhart, Indiana

For some reason, Elkhart, Indiana and RVs have come up in several conversations lately.  I am hoping that at least one reader of today’s blog is actually in an RV on summer vacation.  Many of you have probably driven through Elkhart and passed the RV Hall of Fame (yes that really exists).  Elkhart is the RV capital of the world; more than 1,000 RV related companies operate in Elkhart and half of the RVs you see on the road were made in this rural Indiana County.  Elkhart is also the band instrument capital of the world for those of you studying for Jeopardy.  The chart below shows RV sales over the last 25 years.  Not surprisingly, the industry took a massive hit in 2008, but has recovered all the way back to peak levels seen back in 2007.  With the baby boomers all retiring, one would think that demographics are a tailwind for the RV industry.  Thor Industries (THO), the largest pure play in the space, took advantage of the recession and is now achieving record sales and earnings.  Interestingly, the company is not yet back to peak profit margins.