In contrast with the market’s steady climb over the past six months, the approximate 400 point pullback in the DOW index suggests the market may have begun to factor in risk. Many pundits on television have their ideas about the reasons for the drop: tensions in the Middle East, a less dovish Federal Reserve, elevated PE ratios, and so on. No one really knows the answer. Algorithms and computers drive a lot of day to day market volatility, so when indexes reach certain levels the computers trigger buy or sell programs. This past week, it was sell programs.
Just ten days ago, the S&P 500 hit its highest level ever. This breakout in the index quickly reversed, which begs the question — was it a fakeout? The chart below shows the break in the trendline. Here at Wall Titus, we will be watching this week to see if the support on the indices holds.
Even though these are short term indicators and not fundamentally based, the market does react to them. We monitor and maneuver around them to gain advantage.
Recently we’ve seen some relative weakness in high yield bonds. A few weeks ago when yields reached levels that we thought were extreme, we sold out of all high yield bonds.
We also reduced positions in some equities. While it is impossible to exactly time when to get in and out of markets, we implement a systematic approach to produce better results over longer periods of time for our clients.
Interest Rates and the Market
The Federal Reserve has been slowly decreasing the amount of bonds they buy each month. It went from 85 billion per month down to 25 billion. At the same time, the Federal Reserve kept interest rates low. Ultimately this could be negative for the market as it may lead to higher interest rates. We would argue that while interest rates may go up, it will be gradual, and the stock market’s rise or decline will be based on earnings and the economy. Whichever way that tips over the next twelve months will drive investments’ returns in the stock and bond markets.
At Wall Titus, we will adjust our holdings accordingly.
If you have any questions regarding the market news presented or if would like to discuss your investments in further detail, please contact Wall Titus at 863.683.0708.