INSIGHTS

On November 19, 2018

AAM Viewpoints – Bulls Challenged But Not Defeated

Many of the most dramatic and expansive price swings in 2018 have been attributable to the tariffs issue which has proven to be one of the most stubborn headwinds for stocks. Lacking a resolution on this front, numerous companies have been compelled to issue accompanying statements with third quarter earnings reports, indicating uncertain profit outlooks because of the overhanging tariffs debacle. However, tariffs have not been the only obstacle for stocks. A strong U.S. dollar and a Federal Reserve Board committed to raising rates further have served as downward pressures on stocks as well.

Seldom is a reactive market a healthy one. When institutional traders initiate hair-trigger-selling decisions based on daily headline events it can be assumed that the investment climate is rife with uncertainty. There is a possibility that much of the recent selling directly attributable to prevailing economic, fiscal and monetary uncertainties has “played out” amid the market’s epic trading excursions in October. The CBOE Volatility Index (VIX), which can act as a very near-term barometer of market psychology, hit a brick wall at the 28-level last month. The DJIA’s (Dow Jones Industrial Average) 600-point decline on November 12 managed only to lift the VIX to the 20-area, a far cry from its October peaks. While this does not rule out additional expansive trading swings in the short term, it does hint at an oversold market that is probing for support. This possibility is tentatively reinforced by the nascent bottoming patterns in a variety of stocks representing the core leadership categories in this cycle.

Unfortunately, there is a counterpoint regarding the VIX trading pattern. Investors may be too complacent following October’s unsettling volatility, holding positions in the hope of a swift recovery. If a sustainable rebound proves elusive in the near term, investors may become disheartened, triggering a secondary selloff toward the recent lows. In my opinion, this is a less likely scenario. Even if such a decline were to unfold it might be hard to time and could be short lived in duration. Given the market’s significantly oversold state, I believe longer-term investors should consider a more opportunistic posture with the DJIA hovering near 25,000. The most recent volatility remains within the confines of a correction. Also, the Dow Jones Transportation Average (DJTA) is exhibiting improving relative strength. With bears amplifying their calls of doom, and with stocks braking their downward momentum, the risk/reward ratio may be improving from a longer-term perspective. Depending on the timing and level of a decisive bottom, the October downturn could serve to lengthen the bull market cycle and continue to reinforce my ultimate target of DJIA 33,000.

CRN: 2018-1105-7010R

Opinions in this piece are those of Peroni Portfolio Advisors and are not necessarily that of AAM.