Seasonal Lows Arrived Just on Time: Market Commentary from Cabana’s CEO – October 5, 2021

11 months ago

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Two weeks ago, we pointed out that a long-overdue market correction had likely begun. Despite a snap back in prices that took place during the third week in September and some healthy rotation into cyclicals, the broad market cap-weighted indices have reversed to new lows. The S&P 500 (SPY) dropped 5% in September, for its worst month since March 2020. October hasn’t been much better, as the market was down more than 1% again yesterday.  

The current pullback has occurred despite earnings forecasts continuing to grow, projections for a strengthening economy and an apparent peak in the Delta variant. It is this fundamental data that underpins asset class performance and determines whether we are in a bull market or a bear market. Simply put, bull markets occur when earnings are growing and our economy is strong. Bear markets occur when earnings are falling and the economy is weak. If this is the litmus test, we are not headed for a bear market anytime soon. So, what is going on to cause this big drop in stock prices? I believe that we were just due. Markets don’t go straight up forever. It’s as simple as that. Maybe it’s the bounce in interest rates caused by the Federal Reserve hinting that we don’t need all its support anymore. Maybe it’s the Chinese real estate crisis. Maybe it’s the political back and forth in Washington surrounding proposed legislation and the raising of the debt ceiling. Maybe it’s all of those factors. Whatever it is, it gave investors the excuse they needed to take some money off the table and reassess. It seems to me that is what is going on now.  

The 50- and 100-day moving average for each of the major indices has been breached and the 200-day could be tested before we are finished. That is another 4% lower and would make for an overall correction of around 10%, which is right about where most corrections land. As we move closer to that level, I believe the risks increase that stocks move rapidly to the upside. Don’t misunderstand, we can overshoot and drop even further, but the fact remains our economy is getting stronger, not weaker… and that spells bull market. 

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June 22, 2022

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