“In preparing for battle I have always found that plans are useless, but planning is indispensable.”
-Dwight D. Eisenhower
During periods of increased volatility, I pay close attention to the overnight futures market as well as foreign stock markets. Shortly after midnight, US stock futures were pointing to a drop at the open of 1,200 points for the Dow Jones Industrial Average. Major foreign markets were all down 2%+.
As odd as it may sound, I viewed this as a healthy situation for the market coming into this morning. In a sense, the futures market acts as a pressure release after hours and before the market opens. It helps bring about a more orderly and balanced environment for the normal trading day.
Shortly after the market opened, stocks began trading higher and the S&P 500 Index was up over 1% at one point. This is a good sign but should not be taken as an all-clear signal. The elevated volatility is here for a while longer and that is not a negative development. It ultimately leads to an environment of normal volatility and away from the extremely low level of volatility we have experienced lately which is unhealthy.
Let me emphasize our opinion on what kind of market decline this appears to be to us. We remain in a bull market for stocks. This has all the markings of a normal and healthy correction within a bull market. Corporate earnings are continuing to expand, interest rates remain relatively low, tax rates for corporations have yet to be felt and unemployment is at a very healthy level. Insidious declines in the market (like 2000-2003 and 2008-2009) do not start when the economy is exhibiting the healthy characteristics as it is now.
The crash of 1987, the tech sell-off of 1998 and the flash crash of 2010 are more mechanical in nature. They are “blow offs” of sorts and not a signal of a turn in the economy. Rather they are simply pressure releases of overbought situations. This correction feels in almost every way like a pressure-release type of selloff rather than a signal of something worse to come for the economy.
Here at KIG we could not pass up the selling pressure that was built up at the open of the market today. So, we did nibble a little at a few stocks that had fallen to the price level at which we had targeted to buy them. In our managed accounts we did take a position in two major financial companies, a major energy company and a major chemical company. We have far from depleted the cash position we have to work with as the volatility continues. Patience is a virtue as well as a valuable investing tool.
Kessler Investment Group, LLC