Developed stock markets have sold off indiscriminately on the 24th & 25th of February 2020, and investors are left picking up the pieces regarding the direction of the stock market.
We believe that now is not the moment to jump straight in, but we’re not far off. If you are new to investing or have cash on the side-lines it might be worth dipping your toe in at today’s prices. Warren Buffett – perhaps one of the best investors of all time – has put it best. Rather than trying to ‘time’ what is going to happen with coronavirus, look for excellent companies that are now trading at a bargain.
Here is a summary of where markets stand right now, as pretty much all of the returns for this year have been wiped out:
|Stock Market||24th February||25th February||YTD Return|
|S&P 500 Index||-3.29%||-2.47%||-3.44%|
|Dow Jones Index||-3.28%||-2.64%||-5.7%|
|British FTSE All Share Index||-3.26%||-1.91%||-7.33%|
|German DAX Index||-4.01%||-1.88%||-4.55%|
|French CAC 40 Index||-3.94%||-1.94%||-5.99%|
|Hong Kong Hang Seng Index||-1.79%||0.27%||-5.78%|
|Shanghai Composite Index||-0.28%||-0.6||-2.34%|
|Japan Nikkei 225||-0.6%||-3.34%||-2.58%|
|Toronto TSX/S&P Index||-1.63%||-1.96%||+0.69%|
If you followed our last update on the Market Timing Model on 1st February, as well as the recent post on why investors need to Stand to Your Guns when it comes to value in the stock market, then you realise that it is important to know and understand what stock investments you own and ensure that they are companies you will back during good times and bad.
There’s two ingredients for success in investing:
- Believing in what you put your money into. I genuinely have no worry about the Global Dividend Aristocrats portfolio (Canadians here), or the Vanguard Lifestrategy 80% Equity fund that we have covered here at Frugal Investors. They are safe, well diversified investments with a brilliant future. The Lifestrategy fund has fallen 3.05% in two days against a -5.16% slip for the FTSE All Share index!
- Contributing a set amount of cash each month is a go-to strategy that you could start following today. I allocate a significant amount of my monthly income and deposit it into tax free retirement accounts and tax free savings account each time I get paid. (If you really want to time your entry into the market then read more on the “Market Timing Model” below).
Global Dividend Aristocrats Portfolio
Here’s a great way to believe in your investments: invest in great companies that have rewarded shareholders through dividends and share buy-backs.
For example, we have constructed a Global Dividend Aristocrats portfolio that aims to introduce high quality, dividend paying stocks with a focus on value. I personally invest in this and it allows me to sleep at night knowing that the underlying holdings have the safety and security of dividend and income payments, to keep a floor level for the share price.
What the Market Timing Model Says
For an overview of the Market Timing Model have a look here, for an explanation of what it is and how it works.
Frugal Investors provided an update on 19th January 2020 that suggested Caution Ahead for Stocks. As it happens the advice was pretty spot on:
“That being said I can suggest [that] the likelihood is extremely high for a sell-off of 8-10% within the next couple of months or certainly within the calendar year. Let’s say before March 2020.”
At the moment by following the model we are what you’d call “in the money,” meaning that by using a series of market indicators and economic indicators as our compass, we have managed to avoid some of the carnage today and what might ensue over the coming few weeks.
Here’s a review of the Market Timing Model as of today (25th February 2020). Overall it suggests a “Neutral” rating and certainly not a screaming buy yet:
The New York Stock Exchange new highs-new lows index measures the proportional amount of stocks that have reached all-time highs and then compares it to a 200 day moving average. As of today (25th February) we are on a negative downward trend. Note the steep fall in December 2018: there could be more room to fall.
The percentage of stocks sitting above their 50 day moving average is a good indication of how bullish or bearish the market is; we hit 36.7% today and expect this to continue falling.
The NYSE Bullish Percent Index measures where sentiment sits and suggests that 49.84% of market participants are bullish (positive) on the overall direction of stocks. Note how quickly readings between 75-80% have corrected, at times within several months. This likely has further to fall.
The CBOE put/call ratio measures derivatives activity for traders who bet on the direction of the market. High readings suggest traders have a high degree of negative or bearish sentiment towards the market. Low readings (below 1) or ultra-low readings suggest an excessive amount of positive or bullish sentiment. On 19th January we could see this was excessively positive. Note today at 0.73 we’re creeping up towards negative/bearish trades by traders. It would be good to see 0.8 to 0.85 to suggest a Buy.
This is a critical market measure of volatility. The VIX uses options activity to gauge how volatile the market is, and at 29.34 the reading is actually quite high and it suggests that we’ve nearly broken through the upper control limit (top graph). I suspect if markets keep falling Wednesday (tomorrow) this will trigger a buy as it did in December 2018. Based on the VIX today you could make the case to dip your toe in the water, although the other measures aren’t quite there yet.
200 Day Moving Average
The Market Timing Model focuses on using the 200-day moving average of the index to make decisions regarding whether or not to purchase meaningful stakes in the market.
A copy of an excel spreadsheet for tracking the 200 day moving average can be found here.
The S&P 500 and Dow Jones indexes remain slightly above their 200 day moving average.
However the FTSE All Share, DAX, CAC and most of the Asian markets are currently trading below their 200 day moving averages, which warrants caution.
In general it is better to wait until the end of the week to see what happens rather than trying to trade off of a single day’s return. In fact the backtested data works equally well only running the model on the last day of the month.
So we’ve got a bearish trend in the European stock markets in particular and it remains to be seen where it goes this week. I suspect that the S&P 500 and Dow Jones will also fall below their 200 day moving averages.
Pick an investment strategy that you believe in and be invested, generally, for the long haul. The Global Dividend Aristocrats portfolio (Canadians here), and the Vanguard Lifestrategy 80% Equity fund are two appealing options that we expect to keep pace with or surpass the returns of the major stock market indexes.
That being said if you do want to invest a lump sum in the market use the Market Timing Model to perhaps pick a moment of ‘maximum pessimism’ to put significant portions of capital to work.
At the moment the five indicators we presented today do not suggest we’ve entered a strong buy territory, however, we are getting close.
Watch out for further updates this week & next, as we seek to identify the “moment of maximum pessimism” where shrewd investors can enter the market for the long term!