October 6, 2015

It has been difficult to not be “negative” during the past 3rd quarter, but after Friday Oct 2nd we can start to feel some positive energy in the markets as we enter the 4th quarter. As of most recently, 40% of stocks on the NYSE are back above their 50 day moving averages whereas just a week ago it was only 15%. The Dow Jones is up nearly 700 points, while the S&P500 and Nasdaq also seem to be coming back to life after an ugly beat down. The price of oil has seemingly relaxed and held up during the volatile couple of weeks, this could be due to the reduction in rig count which does directly impact the price of oil (http://www.oilvoice.com/n/Baker-Hughes-announces-weekly-rig-counts/637123f451f3.aspx). However, let me not sound too much like Nostradamus here because there is no way I can call a true bottom in oil.

Our main concerns are corporate earnings and interest rates. With rates so low we are no doubt in a deflationary economy, which correlates as to why earnings have been slow and the job numbers have been so soft. The uncertainty the Fed brings for the economy and the major markets causes a lot of aggravation among businesses and investors who just crave transparency. However, there is no doubt in our minds that this is an oversold market, and when the ground is scorched, it is the best time to look for the green shoots.

In 2014 the companies that led the market were ones that performed well during times of deflation (low rates/lack of growth), such as “safe” utilities and industrials. Can this leadership sustain? We don’t think so, mostly because they offer little growth and leadership always changes hands. However, money tends to flow into these “crash” groups when the market is volatile, but there is no real potential there for growth.

The bottom line is: When the facts change, we must change. Lick your wounds and be willing to rebuild your portfolio. When everyone is fearful it is time to take courage and search for the green shoots.

http://www.bloomberg.com/news/articles/2015-10-06/citigroup-says-investors-should-be-brave-and-buy-stocks