Don't look now but stocks are peeling back a bit after a nice run-up in the beginning of September. Just like so many times earlier this year (in addition to the past five years), strategists are wondering if this is just the market taking another breather.
If you’ve bought dips in the past this year, you’ve probably enjoyed some nice returns. The bears have been seeing future capitulation in every dip, and they’ve been burned each time they’ve bet against the larger market. Josh Brown, CEO of Ritholtz Management and co-author of the book Clash of the Financial Pundits says timing the market is a fool’s errand.
“I regard market-timing and forecasting as absurd,” Brown howls in the attached video. However, if one is so inclined, Brown points out some historical trends.
“Seasonally the back half of September, first week of October, has always been tricky for markets. Nobody knows why, there’s now logical reason, one theory is that going back one hundred years when we were an agrarian society this is when the banks would have to pony up their cash in order for farmers to hire enough hands to bring in the harvest, the banks wouldn’t be as flush, and as a result investment markets wouldn’t get that benefit.”
Seasonality and history of agrarian-focused markets aside, Brown sees one reason why certain sectors are getting hit in the market – the strong dollar. “The dollar has been on a tear, to me that is the number one story for the investment markets of the late summer, early fall… at the end of the day the effect that it has on the equity markets is really interesting.”
Dollar sensitivity is in particular hurting some sector more than others. “For example, the three sectors that have the highest percentage of stocks below their 200-day moving average, they are the three sectors that are most susceptible to a stronger dollar.” Those sectors are industrials, materials, and energy. Brown believes without the participation of these three sectors, it is hard to envision a scenario where the S&P 500 (^GSPC) makes new highs.
What this comes down to is perhaps taking a look at your portfolio to see if a rebalancing is necessary. “A lot of people missed the rally last year where they didn’t capture all of it and what we’ve seen is people taking more aggressive bets in order to make up for that this year,” he notes.
“If you have a one or two percent correction in the S&P which is hilariously small, and you feel uncomfortable or you’re looking at the balance of your account and its down more than you thought it would be on a minor tremor, what’s actionable is you look at that and you say, ‘well why am I betting so heavily on U.S. equities, why are U.S. stocks 90% of my portfolio… maybe I’m not doing enough in fixed income?’” Essentially, in Brown’s eyes it's time to take a litmus test of your portfolio and see if anything’s out of whack.
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