Well do you want the good news or the bad news first? Ok, let's get the bad news out of the way.
Ready, the markets laid an egg in August with the S&P 500 off more than -3.13%. The Dow Jones Industrial Average was off -4.45%, but surprisingly the riskier indexes of the NASDAQ and EAFE were off only -1.01% and -1.59%, respectively.
So how can this be that the lower beta (less volatile) indexes sold off more in August. You have got me!
Some of the strength in the NASDAQ related to news of Apple, Inc.'s new product releases and also Microsoft Corporation Chairman Steve Ballmer's announcement he would be retiring. EAFE index relative strength was likely the result of stronger economic data from this part of the world leading up to the elections in Germany. Funny how this seems to work out where data is better prior to an election (sarcasm)!
Quite frankly I have never seen anything like this current market in seventeen years of managing money. If it wasn't for a sell off during the final few days of August, I believe both the NASDAQ and EAFE would have been positive for the month.
This market has so many crosswinds right now. We have continued trend stifling interference in the markets by the Federal Reserve and other Central Banks around the world. We have growing unrest in the Middle East. We have debt ceiling debates to look forward to in the Congress. I could go on and on!
The markets have traditionally climbed a wall of worry, but with so many possible crosswinds and so little reliable information on which traders can hang their hats, I am afraid this market may already be in extra innings. My guess is 2014 will not be pretty!Stock-Signal.com Performance
You may have already guessed from all the cross currents mentioned above that "the trend was not your friend" in August. Most of the seven indexes we follow are just not trending right now. In fact, they are trading based on news alone. This makes for lumpy moves and tremendous uncertainty. Since most of this news is happening after hours or over weekends, the only way to capture these news driven market moves is to already be sitting in the position (and properly positioned) when the news breaks.
Not all was lost of course, we did two things last month. First, we protected capital and in our sample portfolios, we lost less than the overall markets as measured by the S&P 500. Second, we actually made some money in select indexes, i.e. the EAFE Index.
Ok I lied, we did three things right. We also beat the pros again by besting the NewEdge CTA Trend Following Sub-Index in our two sample portfolios.
Obviously for the year we are trailing the broad S&P 500 index by a bunch. However, I do want to remind you that equity trend followers tend to under perform in up markets. This is because we do get false signals that cost us money. The past few years have been arguably the worst in history and much of this return disparity is due to Federal Reserve and U.S. government interference in the markets, either directly or indirectly.
We typically call this up market underperformance, the cost of insurance that pays off in the down market!
Sooner or later, the next down market will occur and, assuming limited government interference, this should be where the money is made. In the last bear market, many trend followers averaged +25-50% years. I cannot promise this, but can say that trend followers tend to do well in Bear Markets.
I would again point you to our post entitled "Get Rid of Your Investment Worries Once and For All!" on the benefits of pairing more traditional value or buy and hold strategies with a trend following strategy (or signals) like those delivered by Stock-Signal.com.Market Forecast - September 2013
The goods news (I think) is we are prepared for September. Our forecast is that it could be a wild ride (just like Mr. Toad's Wild Ride at Disney World) in September and we expect the month to end on the negative side.
According to Stock Traders Almanac:
Since 1950, September is the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971) and Russell 1000. A 3.1% advance last September lifted Russell 2000 to second worst (since 1979). September was creamed four years straight from 1999-2002 after four solid years from 1995-1998 during the dot.com bubble madness. Although September's overall rank improves modestly in post-election years going back to 1953 (third or fourth worst month depending on index), average losses widen to 0.9% for DJIA, SP 500 and NASDAQ and to 1.6% for Russell 2000. Although September 2001 does influence the average declines, the fact remains DJIA and S&P 500 have declined in 9 of the last 15 post-election year Septembers.
We expect no less this September. Further sticking my neck out with a forecast, I would guess that October is also going to be a bit tricky. However, the seasonally strong months of November and December will once again save the day in 2013.
2014 in our estimation is when the real fun will begin! It may take till May, but we believe the next bear market will come next year.
Of course our forecasts are purely educated guesses and not meant for trading. We would recommend you just follow the signals, they will get it right and keep you out of trouble over time!