There’s a Lady Who’s Sure All That Glitters is Gold

At this time last year the stock market had been falling since New Year’s Day.  It was the worst start to any year for stocks.  In the prior months, crude oil had collapsed from $100 per barrel in early 2015 to under $30.  Further there were broad worries that China would devalue their currency which would place additional pressure all developing economies.  Angst and pessimism abound.
The markets stabilized in mid-February and began a stair step journey that has lasted a year.  This pattern of advance, pause, advance, pause, withstood Brexit, the U.S. presidential campaign, elections in France and Italy, and of course, Donald Trump’s victory.
The chart below covers the S&P 500 for the past 12 months.  The red line is the 200-day moving average, the blue line is the 50-day moving average, and the black line is the 10-day moving average.   These lines provide context for viewing the markets for different time periods.  The 10-day line is an indicator commonly used by traders to gauge short-term movements.  The 200-day gives perspective for a longer time frame as it is the average for almost a year’s worth of trading and it considered significant when it is crossed – both advancing above and falling below.
As can be seen, once the 200-day (red line) was reclaimed in March, it was only tested in late June (Brexit) and just before the U.S. election.  Both times the level held and the markets bounced signaling the bulls were in control.  Since the election, the 10-day (black) and 50-day (blue) have acted as support for the rally.


The steadiness of the rise since the election is another noteworthy characteristic of the chart.  There has not been a daily drop of 1% or more since October.  This totals 89 trading days which is abnormal.  You would have to go back to before the financial crisis to find a streak this long.
Here are how the major averages have performed from the lows of last February.  Also included are the year-to-date numbers for 2017.
YTD 2017        Since Feb 2016 lows
Dow Jones Industrial Average                   +4.4%                      +31.70%
S&P 500                                                     +5.0%                      +28.54%
Nasdaq Composite                                     +8.5%                      +36.85%
Russell 2000                                              +3.1%                       +46.78%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividend.
The Nasdaq has led the way so far in 2017 and it is part of the 37% advance over the past 12 months.  Below is a chart that calculates the Nasdaq’s rolling 1-year percentage change.  A couple of noteworthy observations.  First, this past year isn’t that significant as there are many years with higher returns.  Secondly, there are many examples of disappointing years following a 30% or better gain.(i)
“‘Cause You Know Sometimes Words Have Two Meanings”
Looking in the rearview mirror, it’s easy to think it was a good time to make money and that everyone had a great year.  That does not appear to be the case.  A lot of money was pulled out of equity mutual funds during the past few years and we have mentioned this in previous newsletters.  Of course, a good portion of that capital stayed invested but used exchange traded funds which can be traded throughout the day and, in many cases, have lower expenses.
The chart below show the weekly equity mutual flows for the past two years.(ii)  Notice the massive and steady outflows especially in the past year as U.S. stocks zig-zagged higher.  There was even a large outflow in December as the Trump rally was well underway.  Also, please note that there was a net inflow in the last report.  On one hand this could be the start to a trend which could help fuel further stock gains.  On the other hand, this could mark a capitulation top as the crowd has a history of poor timing.

There is an old market adage that stocks climb the stairs up but take the elevator down.  In other words, moves lower happen a lot faster than the rallies.  The U.S. stock markets have clearly been taking the stairs for the past year.  Is there an elevator trip in our future?  At some point, probably.  But that can provide an opportunity for investors who are properly positioned to put capital to work.
The markets have been strong so far in 2017.  There have been a series of record highs together with strong breadth.  Looking forward, we anticipate that the markets will be much more challenging than they appear in the hindsight of the past 12 months.  Remember the volatility surrounding Brexit and Donald Trump’s upset win?  It was easy to move to the sidelines and into cash.  There will be those types of trials again.  But opportunities arise out of these types of situations and a new stairway will appear.
Jeffrey J. Kerr, CFA
Kerr Financial Group
Kildare Asset Management
130 Riverside Drive
Binghamton, NY 13901

i.The Bespoke Report, ,February 17, 2017
ii Topdown Charts, February 17, 2017
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