Lessons

Janet was inconsolable. “Get me out,” she said a few times. “I want to be in cash.” And so it was. Another person unable to overcome emotion. One more victim of the Dow. And the media. It’s a story that’s repeated every single time a bout of volatility grabs the headlines.

As you may have noticed, if the Dow index loses 300 points the media response is “MARKETS PLUNGE!” When the Dow gains 300 points, the story is… well… there isn’t one. That’s not news.

This may be because over 70% of the time financial markets advance, people make money and are able to buy houses, raise families, pay for college and finance their retirement. Markets rise because the world grows. Growth means more jobs, economic activity, expansion, consumption and profits. That’s normal. And never in human history have people lived in more prosperous times than these.

So it’s news when stuff goes down. Even if history has proven that every single time the decline is temporary, and usually useful. It blows off the gamblers and speculators, pricks asset bubbles, brings prices back into line with incomes and, of course, provides one muddah of an investment opportunity. Every time the market seriously corrects, it has rallied about 40% over the next two years.

But some can’t see beyond the headlines. Fear is fear. The strongest emotion. It makes people do crazy things, like turning a temporary paper loss into a permanent real one.

Here at the Greater Fool Brain Trust and Dog Ranch we have two messages today: first, the Dow is not ‘the market.’ It’s a gauge of merely 30 companies trading in New York. The S&P 500 is more representative, but there are a number of other indices tracking, for example, small-cap companies (those with less in market capitalization) or the tech heavies. The US has 13 exchanges, and there are dozens more around the world just for equities (like the TSX on Bay Street). They don’t all move in harmony. Therefore smart investors have a diversified approach – exposure to Canadian, American and International markets (including emerging ones), and do it through ETFs, rather than single stocks.

So the next time you hear the TV talking head with the nice hair equate the Dow with everything financial, just smile to yourself and whisper ‘moron.’ It works.

Okay, message two: markets are not just stocks. For months now this pathetic blog has been harping on bonds, explaining why you should have some. No, not to collect interest. Nobody buys bonds for yields any more. Instead they’re assets that reduce volatility, counterweight stocks, drop risk and help preserve wealth. All you need do is look at some bond ETFs over the past month, or for the YTD.

As equities stagger and growth slows, money flows into bonds. So the price goes up and the yield goes down. That’s why we’re hearing about this ‘inverted yield curve’ all the time – so much money has found its way into the bond market that 30-year yields are now lower than what your savings account pays. But bond prices have zipped higher. If you have the right kind of bond ETFs in your portfolio, you know this. For example, the WisdomTree Yield Enhanced Canada Aggregate Bond Index ETF is worth 9% more in the last seven months. And it’s not alone. As stock-based assets have temporarily come down, bond-based ones have advanced. It’s why you should have a balanced portfolio. How is this not obvious?

Well, Janet doesn’t get it. Or care. Like many people she thinks (a) it’s different this time and history doesn’t matter, plus (b) markets can go to zero and never recover. If that happened, of course, we’d all be braiding grass and eating bugs. Financial markets reflect life, society and human labour. If you have the confidence to accept the monumental danger in getting married, having kids, starting a business, planting a crop or running an open blog attracting scores of misfits, then staying invested is a minor thing.

Remember the real risk. You know what it is. Losing money doesn’t even come close.

Now, I see that my colleague and fancy portfolio manager Ryan has just come down from the private helo pad. He appears to be carrying a big chart.

Hey, bud, have you got a technical update for us on the stock market?

Big day yesterday but no real technical damage. The SPX has broken through its 50-day MA and is now approaching the important 200-day MA around 2800. The key technical support range is 2725 to 2800, which is the combination of past support lows (blue arrows – Mar and May lows), the important 200-day MA and the 38.2% Fibonacci retracement level. When a number of technical supports converge to one key zone it increase its importance. Also we’re getting close to an oversold technical reading with just 26% of stocks in the S&P 500 above their 50-day MA (below 30 indicates oversold) and the RSI level is at 38 (needs to get below 30 to be oversold). So we could see a bit more selling pressure but my bet is the SPX bounces off the 2725-2800 technical support zone. If correct we then need to see the SPX retake its 50-day MA to then give the all clear sign.

Click to enlarge. Stand back.

Any questions? Good. Now let’s take Janet clubbing.

About the picture

A group of service dogs in training attend a performance at the Stratford Festival. On the job they’ll be expected to navigate places like this, sitting in confined spaces for long periods of time, ignoring flashing lights, food, loud noises and attending to the needs of their human companions. Source: CBC