Winning in a trading range
Yesterday’s Federal Reserve announcement ignited a stock market rally that sent the S&P 500 to a narrow gain for this year. The context of this announcement surprised investors because the Federal Reserve and Janet Yellen indicated the economy was actually weaker than the recent data suggested. A weaker economy means the Fed might delay the inevitable day when it must raise interest rates. Investors took heart that this day might occur later rather than sooner.
The stock market has been revealing a very consistent pattern this year. Last year, I wrote about the “Long Dry Road”, and I suggested the stock market would be flat and tethered to the dock for the foreseeable future. Essentially, this has been the case.
This condition is evident by the behavior of the market for 2015. In January, the S&P 500 fell 3.6%. It recovered 5.1% during a banner February. After enduring substantial volatility, the market rests virtually unchanged for this month of March. You can see from these swings that the market is solidly entrenched in a trading range.
A trading range can give an advantage to shrewd investors. This trading range dictates buy at the low end and sell at the high end. Each period of gains should be followed by a pullback and each decline should hasten a buying opportunity and the market should subsequently recover.
Pundits, the financial press, and people who want to sell a story might have you believe the market is bracing for a substantial decline this year. Often, you hear a 20% correction is imminent. These predictions are based on flimsy supporting data. Furthermore, people advertising a market decline are not the same people that actually control the monolithic pool of money. For example, if you see or read a dire forecast, it is unlikely that the chief investment officer of an organization like CalPERS will be actually selling their equity holdings. CalPERS will remain invested while doomsayers carry on with their forecasts. If the guys in charge of all the stock don't sell, the market can't fall very much.
Investors win by being cognizant of the investment climate in a trading range. The order of the day is to be discerning about which stocks to hold and which stocks to harvest profits. This quarter, we sold major holdings for our clients in Alibaba, Union Pacific, Apple, Cummins, and Raytheon. In these cases, we took the opportunity to sell, capture recent gains, and redeploy this money to new opportunities.
Tactics like this will be essential for portfolios to gain in this trading range.