Positive Focal Points
Pfäffikon SZ, Switzerland – The financial markets continue to require attention now that the volatility has increased significantly over the last several weeks. Sharp price drops are followed by sharp rises. In my last column I noted that many did well in explaining the price decline. After all, there is a long list of things to worry about in the world. Last week’s question was about if you’re a short seller because the prices are declining, or because something is fundamentally flawed. Now that the prices seem to be recovering somewhat, it’s time to point out some positive focal points.
Crucial
The 200 day rolling average is regarded as crucial to many technical analysts. I am not a fan of technical analysis, but the 200 day rolling average is a figure to keep in the back of your mind. When the S&P 500 dives through it then the odds of closing the year at a loss are certainly larger. The stock market is a complex system and does not lend itself to be predicted, this much everyone knows. It is also pointless to occupy oneself with it on a daily basis in that manner, or worry about it. Why the 200 day rolling average makes a reasonable benchmark seems to have to do with the trend like behavior of the stock market as a whole. “The trend is your friend” is often said, a statement which certainly applies to the stock market. The 200 day rolling average, one way or another, seems to be the ideal benchmark for a change in the trend.
Increase in blood pressure
It’s interesting to see the S&P this month dive under the 200 day rolling average. This immediately increases the blood pressure of the technical analysts who then automatically predict more misery. This in and of itself is predictable. The fact is that the S&P 500 closed this week with the largest price increase in a year, above the 200 day rolling average. The so-called correction can better be labeled as a reasonable dip. On the basis of closing prices the maximum decline in the S&P was only 7.4 percent.
Dip
In any case, buying in a dip seems to be this year’s best strategy. The announced misery turned out better than expected and in the mean time the prices have dropped. When prices decline due to Ebola and at the same time job figures are published in the US reporting a decline in unemployment – which we haven’t seen in nearly 40 years – that is, to say the least, peculiar. Sometimes we welcome hysteria, but up to a certain point.
More Misery
Is all the market misery behind us now? Like I mentioned, no one knows. Positive facts, however, are being ignored. Take for instance the declining oil price, which could act as a boost to the economy, despite its deflationary impact. Moreover a cheap euro gives Europe some extra options to finally climb out of the economic ditch. The declining economic activity in China is best described as a cool down rather than a hard landing. In addition it seems that an interest rate increase in the US won’t be a point of attention until the end 2015 and the so called President’s Rally is getting more and more grip on the market. Last but not least the ECB started buying bonds ahead of schedule.
However there certainly is a fly in the ointment. As soon as the central bankers let the market truly carry its own weight, the markets will record lower prices globally. This month the Fed officially relaxed their monetary policy by ending tapering definitively. This is one of the reasons for the observed turbulence. Warned is forearmed.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
