WASHINGTON. After going on a 5-day bullish tear after the turn of the year, stocks settled down a bit Wednesday. Mr. Market seems likely to carry on in this relatively mellow market mood Thursday. At 11 a.m. ET, market averages seem content to hang around flatline, with all three major averages down 0.05 percent or less.
As we’ve seen over the last several months, the mellow market mood today may have nothing to do with how stocks close at 4 p.m. But it may help mellow out the market’s massive, sudden and surprising overbought situation, as reflected in Wednesday’s McClellan Oscillator reading.
Mellow market mood: Certainly better than endless bear raids
Computerized and / or algorithmic trading programs helped drive the vicious but still short-term post-Labor Day bear market conditions. But, as we’ve noted numerous times, Mr. Market also anticipated that earnings comparisons between FY 2018 and FY 2019 would “disappoint.”
In some respects, this “disappointment” is irrational. Given those big jumps in corporate profitability in 2018, investors surely realized that 2018’s numbers were juiced by the Trump-GOP tax cuts. They went into effect last January, and, after a rough start, majorly influenced stocks on the upside.
Now that these cuts have become part of the current investing picture. Even if companies remained on a tear in 2019, positive comparisons would still pale in comparison to those massive profitability increases in 2018. In other words, even if companies continue with above-normal earnings success, the comparative numbers Year-on-Year may still look lame.
Maybe this is a case of “What have you done for me lately?” But this potential for “flattening” corporate profitability this year likely contributed to last fall’s overreaction on the downside. Whether this overreaction carries over into 2019 remains to be seen. At the very least, we may see January’s bullish-to mellow market mood abruptly change, one way or the other.
Mr. Market: Now suffering from PTSD?
That confronts reasonable-to-conservative investors with a real dilemma. Has Mr. Market touched bottom in this cycle? And if so, are we staring an incredibly bullish investment opportunity in the face? Or is the current bullish lull just another stop on the down-elevator on the way to some kind of horrific bear market bottom? In other words, is it better to keep our money in money market funds, short term US Treasurys, or inside our own mattresses at home?
Tough call, and frankly, we can’t make that call. So we continue to hedge. That’s not a very brave strategy. But our portfolios were ahead close to 8 percent throughout much of 2018 before crashing to a final 7 percent loss at the end of FY 2018. We’re still suffering from portfolio shell shock, aka, portfolio PTSD.
But by gritting our teeth and mostly holding firm with perfectly good stock positions that were killing us, we recovered half those 2018 losses in just a few days this January. Dilemmas proliferate. Should we do nothing right now, lulled into complacency by the currently mellow market mood? Should we now take our meager profits and run? Or should we hold on, risk another nasty plunge and still stick around for an even bigger recovery… whenever?
No good answers here. Mr. Market is acting coy right now, a riddle inside an enigma or however that useful cliché actually goes. So what we’re going to attempt is playing both sides against the middle.
Righting our investment ship and readying for uncertain seas
First, we’ll start adding back to our neutral to slightly down holdings in index ETFs, one or two shares at a time. That’s because current prices of these ETF shares are substantially below the higher prices we paid just before the autumn 2018 debacle. If Mr. Market continues relatively positive, that helps us average down on the per-share price of these ETF holdings. We can do this with impunity, one to five shares at a time, because the ETFs we favor are commission-free.
We also intend to balance out our large positions in preferred stocks, many of which we picked up in the oil and gas and fuel transportation sector. As a result, we over-weighted ourselves in this industry, which lately is proving unnaturally volatile. Paring back a bit, even taking modest losses to get out, improves the balance of our investing mix.
Our equally oversized and disaster-prone position in giant drug-maker Allergan (trading symbol: AGN) hangs like a useless boat-anchor on our current portfolio results. However, after paring that position a bit, due to yet another horrendous decline late last year, we continue to hold the bulk of it, as prospects continue to improve.
Keeping positions modest. And diversified.
As we’ve said many times before in this column, that oversized Allergan position taught us yet again that a huge position or bet in a single stock can either make you rich or rip a black hole into your portfolio results. This one was a black hole for us, although new buyers in this one may be pleasantly surprised in 2019. We hope that we will be surprised, too.
What about making new investments? Surprisingly, that might be on the table as well. We do hold a large-ish, recovering position in RYT, the Invesco (formerly Guggenheim) ETF that invests in technology stocks on an equal-weight (less volatile) basis. This month’s early recovery only puts us down about 3.5% in that big position, so maybe it’s time to average down.
At least one investment advisor thinks beleaguered and very oversold semiconductor / memory chip stocks like Lam Research (LRCX), Nvidia (NVDA) and Micron (MU) could be good bets here. We’re looking at these but not biting just yet.
The value of “watchful waiting”
At this point, Mr. Market eerily reminds us of advice given to some patients exhibiting early signs of cancer: “watchful waiting.” I.e., okay, we think you have cancer. But if it’s not too aggressive, maybe the best course is to keep an eye on it. Check it out every few months. And only jump on it if it starts looking aggressive.
As for stocks, watchful waiting is what we’re mostly doing right now. If individual stocks or sectors begin to make more definitive moves one way or the other, that’s likely the time for more aggressive action. One thing’s for certain. Volatility remains with us. So today’s mellow market mood probably won’t last much longer.
— Headline image: Mellow market mood? Or just letting sleeping dogs lie?
Public domain image via Pixabay.com. CC 0.0 license.