“Nasdaq ‘Death Cross’ forms ‘Four Horsemen’ pattern”

nasdaq deathcross

Does that headline get your attention? It’s meant to. That’s what the mass media does… they grab your attention, engage you, entertain you, and use your attention to sell ad space to marketers who’d really like to have you buy their product.

In fact, the marketing team at CNBC.com apparently thought this headline was so catching, they used it to tease their new subscription based product, CNBC “Pro”, which, according to their website, you can use to: “Make Better Informed Investments with Access to Pro Content Now.” The article went on to say, “The Nasdaq composite spooked investors on Monday after forming a death cross, a trading pattern that shows a decline in short-term momentum and is often a precursor to future losses.”

That’s great insight, correct? Worth paying the extra $299/yr. for the pro subscription, right?

Possibly, except for the part that their prediction on the market direction was wrong. Way wrong.

Since the market close on the day that article hit the website, (September 28), The NASDAQ and the broader market have essentially gone straight up, with the NASDAQ posting a gain of 10.7% as of this writing, and the S&P up 10.2%.

Had you let that sensational headline and the dire predictions of future losses drive your portfolio decision making, it’s possible you would have missed the bulk of the gains for 2015 in the one-month period you’d been out of the market. Indeed, a 10% return is all we could hope for in terms of posting a good year in the market, much less a few weeks. To the author’s credit, if you took the time to read the entire article, he does confine the dire prediction to the “short term”, which he defines as less than one month. In the long term, defined as more than three months (Really, just three months?), he points out that, “performance improved drastically with the market up 75 percent of the time three months out.”

So armed with this information, what’s an investor going to do? Am I supposed to sell? If I do, when should I buy back? If the market performance “improves drastically” three months out, is a “Four Horseman Death-Cross” really a buy signal????

The simple fact of the matter is that if you’re an investor, you should do nothing. You should ignore the article and others like it. In fact, you should have never read it in the first place. The mass media is not your investment advisor, and they have no interest in your personal financial plan.

I recently came across this insightful quote in reading the Chernow biography of Alexander Hamilton:

“Nothing can now be believed which is written in a newspaper. Truth itself becomes suspicious by being put into that polluted vehicle.” – Thomas Jefferson, circa 1791

 Hamilton, as you may know, was the driving force behind the creation of our central banking system and the first Secretary of the Treasury under George Washington. Reading about the conflict between Jefferson and the Republicans and Hamilton and his Federalists (as the party was then known), the arguments over government debt, higher taxes, public spending, market speculation, and manipulation of the media for personal gain made me reminiscent of, well, yesterday. 220+ years later, it is clear that:

  • The government, 43 executives later, is about the same
  • Taxes, after all the changes, are about the same
  • The economic struggles are about the same
  • Concerns over debt levels are about the same
  • The discussions of immigration are about the same
  • The media, despite being much faster, is really about the same
  • Through all of this, the equity markets have delivered consistent, long term rewards to patient investors

So what’s an investor to do?

At Cascade, we break the investment process down into three definitive steps:

  • Plan Wisely
  • Invest Confidently
  • Enjoy Life!

While I’ve written pretty extensively in previous issues about all three, the idea of being able to “Invest Confidently” comes clearly into focus in volatile markets such as these. The ability to invest confidently comes from initially doing the proper planning, and aligning your portfolio with your values, goals, and objectives so that you tilt the odds in your favor when it comes to achieving the financial objectives that are most important to you. Let’s quickly review a chart I posted during the September volatility:

Total Real Return

In summary, this points out that the best place to invest is in the stock market, at least for the portion of your portfolio that is dedicated to capital appreciation. This is as true today as it was during the September volatility, and as it has been since the 1800’s when Hamilton was being accused (incorrectly, as it turns out) of manipulating the markets to speculate on bank stocks.

Unfortunately, too many investors succumb to emotional decision making prompted by the press and worry about their investments, or worse, sell into a down market. Yet, despite the dire warnings and gruesome images conjured by the press with the coming of the apocalypse, a review of history shows that September’s volatility was pretty typical. In fact, there has not been a year since 1980 where there hasn’t been an intra-year pullback in the equity markets, and the average pullback has been in excess of -14%.

Intra-Year Pullbacks

Despite that, the S&P has managed to post positive returns 77% of the time. As of September, this year’s pullback was -12.2%, which we would consider to be “less than average”, and the slide was all but eliminated in the month of October. The bottom line to all of this is this year’s market action is not uncommon, and we have seen this before. Our investment strategies have been developed over the last few decades specifically to prosper in environments such as these. While there is no guarantee of what the future holds, our best thinking suggests that in periods of market turmoil, we stick with our strategy while constantly evaluating the market and the investment opportunities in an effort to maximize our value to you.

There is one thing we can count on for sure: More volatility. Indeed, we will likely see a significant jump in volatility once the Fed starts to move to increase interest rates, supposedly now on the table for December. As I’ve written about previously, while volatility may increase and the day of the announcement promises to bring much news-worthy drama, rate hikes are generally positive for the equity markets, at least until the Fed inevitably “over-tightens” and the yield curve inverts. While we are a long way from that environment, it is certainly a change we will be watching for, as an inverted curve presents its own investment opportunities. (When we see that, you may actually see me writing positive commentary about bonds again, which is something I really haven’t done for almost a decade.)

Now that we know what’s going to happen when we have a rate hike announcement, I suggest you skip all the media noise that will ensue surrounding the event. Perhaps instead of wringing our hands over the next market move and sensationalized headline, we should go out skiing or playing golf… literally “Enjoying Life”.


Nasdaq ‘death cross’ forms ‘four horsemen’ pattern: http://www.cnbc.com/2015/09/28/nasdaq-death-cross-forms-four-horsemen-pattern.html

Total Real Return Index Chart: http://www.aaii.com/files/images/articles/9298-figure-1.jpg

Intra-Year Pullbacks 1980-2015: AthenaInvest 2015