If anything, 2020 has been nothing short of historic and strange for various reasons. We experienced the fastest bear market in history and one of the most astounding market rallies following. The Nasdaq just set a record for the fastest 10% correction from all-time highs. It only took 3 days beating the previous record of 6 days, set in, you guessed it, February of 2020. All the while during a once in a lifetime pandemic that has besieged the world. We have witness extraordinarily swift actions from Congress and the Fed on monetary and fiscal policy. In our last blog post we asked if the market was due for a pause. Well, we certainly got that wrong as last month was the strongest August since 1984. Considering the craziness of the first 8 months of the year we could be due for some more unpredictable market behavior over the following few months.
Time to buckle up because we are in for a potentially wild election season. The uncertainty heading into this election could be of massive proportions. Historically, the winner of the election is determined on election night. Outside of the 2000 election, most are run smoothly. However, this year could make the Bush/Gore fiasco seem like a walk in the park. With the amount of mail in voting, and the partisan rhetoric on both sides, we may not have an actual winner for months. The one thing the markets hate the most is uncertainty. That is why October of an election year is the worst month all year. Typically, heading into an election their is enough doubt to keep investors on the sidelines. This year the anxiety may be at epic levels before and possibly after if we get into a contested election.
This is all happening as the market enters the weakest month of the year followed by the weakest month (October) in an election year. Ryan Detrick shows the returns of all months over four different time frames while highlighting September.
One of our main concerns we identified in our last post was the excessive move in the indices on weakening breadth. This negative divergence on its own isn't completely bearish. What it needed was a break in price to confirm the signal. The Nasdaq certainly had a break as it had the fastest 10% correction off all-time highs ever while also breaking its trend-line support. The S&P remains in the channel but is testing the lower trend-line.
Lets back out and look at a longer term chart of the Nasdaq. The weekly chart since the 2009 bottom reflects a clearly defined channel. The Nasdaq has overshot both the top and bottom trend-line support in an extremely volatile 2020 which seems par for the course in a crazy year.
Back in an April blog post we shared that we thought the most comparable precedent was the 1998 and 2018 market V-bottom.
Two observations from 2018 and 1998 that might resonate with today's market is what happened after the rally stalled out. The Nasdaq rallied 78 days in 1998 and 85 days in 2018 before slowing down. After the rally off the bottom in 1998, the Nasdaq grinded begrudgingly higher in a choppy manner from February to October of 1999 before resuming higher in the ultimate blow off top into 2000. During the 2018 rally, the Nasdaq went no where from May to November of 2019 in a sideways choppy sector rotation type of market. If the current rally peaked in the short term on 9/2/20 it would be 113 days from the March lows.
Considering the excessive move in tech stocks and the over bought nature of the Nasdaq in August, what is interesting about the current market is sentiment never reached an extreme. The CNN fear and greed index is moderately greedy while the AAII sentiment index is downright bearish.
The long term trend remains up on the S&P and Nasdaq. Studies show that strength begets strength and returns should be bullish looking out 6, 12, and 18 months. However, we have to be open to all possibilities and flexible in our decision making. We remain bullish and believe the market resides in a new secular bull market. Yet, that doesn't mean there won't be periods of range bound frustrated trading with corrections and pullbacks. The current market clearly reflects that risk. As we enter a seasonally weak time of year coupled with the massive unknown known of a presidential election we prefer to err on the cautious side and don't plan on being overly aggressive on our long book. Based on prior precedent, the timing makes perfect sense for the market to pause and catch its breadth from the massive run off the March lows.
Lets take some time to remember those that lost their life 19 years ago and be grateful for the opportunities our great country provides. Never Forget.