Market Trends and Insights: Investing Through The Big Chill

investor skiingIt’s freezing here! I know this is the middle of winter, but temperatures in the single-digits in northeastern Tennessee are not normal! Perhaps up in Minnesota, but not here. And we aren’t the only ones that are being affected by the weather. News reports indicate that almost 80% of the United States has faced plunging temperatures.

What does that have to do with investing? A lot.

When it comes to investing, it is important to recognize the season that we are in. For instance, my wife really enjoys gardening. She loves the taste of fresh vegetables and would like to have them all year round.  Unfortunately, planting seedlings in single-digit temperatures aren’t likely to produce the desired harvest!

This may seem simplistic, but we sometimes need to be reminded that the economic season we are in is not conducive to an abundant harvest of stock market gains. Worldwide market trends are seeing country after country struggling to maintain economic growth. Declining growth has a deflationary effect on markets. Oil is down, commodities are down. Stocks are holding up, but companies are struggling with top-line growth. Japan, China, South Korea, India, Europe, the U.K. and Canada are all slowing. And so is the United States.

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There is a struggle playing out in the markets between the perma-bulls and those that realize that we are in the late stages of a multi-year Bull market. And the volatility has increased. Just prior to the markets opening on Monday, the futures indicated the markets would be positive. But within minutes, the S&P 500 dropped three-quarters of a percent on above average volume; a sign that the stock market remains volatile.

There are bets being placed on both sides. And right now the Hedge Funds are leaning heavily that the S&P 500 will go up. There are +170,240 net LONG positions as of the end of last week compared a 6 month average of only 14,575 contracts. They are also heavily betting that interest rates on the 10-year UST will go up. There are -250,163 contracts versus the 6 month average of -72,383. In other words, most of the Big Boys are all crowded on one side of the boat. The markets have a tendency to punish people in that situation.

For weeks/months I have been saying that I have been avoiding stocks and have been in cash and bonds. Bonds such as the 20 year+ Treasury Bond (TLT) have performed very well without all the ups and downs associated with stocks. But the extreme risk levels that were present in October have been dissipating, so I am actually looking to begin putting that cash back to work in stocks and if we see the right pullback, that’s exactly what I expect to do.

In the end, though, I feel we are still in the midst of Economic Winter and, although, there are a few sectors of the market that can do well, it’s not time to be overly aggressive. I expect to maintain the elevated level of bonds and will add defensive stocks such as targeted REITS, healthcare and consumer-staples until we get the right pullback and/or market trends are more favorable.

Here’s a look at my trending indicators:

Market Trending Indicators

US Stock Market              Trending Down

Canadian Stock Market        Trending Down

US Bond Yields                 Yield’s Trending Down

It won’t be long before we see the temperature here in northeast Tennessee start to climb again and winter turn into spring. And it is likely that during 2015 we will see the economic climate become conducive to much higher levels of equity exposure. The markets, though, still have not adjusted (in my opinion) for the slower growth we are currently experiencing that will soon become evident in the economic indicators and market trends over the next three months. That potential for correction will be the opportunity that I’m looking for.


Follow Jeff on Twitter:  @JeffVoudrie

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.