The Calm Before the Storm?
Flexible Plan Investments
By Jerry Wagner
August 30, 2012
"The soft summer wind stirs the redwoods, and wild water ripples sweet cadences over its mossy stones. There are butterflies in the sunshine, and from everywhere arises the drowsy hum of bees. It is so quiet and peaceful, and I sit here, and ponder, and am restless. It is the quiet that makes me restless. It seems unreal. All the world is quiet, but it is the quiet before the storm. I strain my ears, and all my senses, for some betrayal of that impending storm. Oh, that it may not be premature!" - Jack London, Iron Heel
I know these are the dog days of summer, a time that Jack London captured perfectly in the quote above. Nothing much is happening in the financial world as summer draws to a close.
There was little news from Europe. The last of earnings reporting season is behind us, and while the results were the worst since the rally began in March of 2009, they were not terrible. The beat rate is low, but earnings are now the highest level ever, yet stocks are still undervalued by the popular P/E (Price/Earnings) multiple measure.
And there were virtually no economic reports last week to stir investor imaginations. It was a bit disconcerting that five of the seven were worse than expected. Hopefully this week will be different as the Dallas Fed Manufacturing report was a major positive surprise this morning coming in at -1.6 when -8.0 was expected (it was 13.2% last month)!
With barely a wisp of wind stirring the canyons of Wall Street last week, the S&P 500 essentially went nowhere, losing 0.50%. And the NASDAQ 100's tech-laden index of high flyers nudged downward just 0.08%. The slight downturn was like a pebble in the road rather than the pothole so many had expected the financial markets to hit.
Even the so-called fear index (VIX) was remarkably quiet. While it rose slightly from the previous week's year-to-date low, it still remained relatively docile.
As we pointed out last week, while low VIX readings are not to be feared, increasing VIX levels do cause concern. It remains to be seen whether the slight upturn last week is signaling anything as yet. So far the index seems to be well within the down trend established since the beginning June. The VIX turnaround, however, could be a prelude to a market correction. The low volatility could be the calm before the storm that Jack London feared.
I thought about this as the tropical storm known as Isaac rounded the Florida Keys and made a wide turn toward New Orleans, where the weather was fair – sunshine and gentle breezes. If not for the National Weather Service's eyes in the sky and their advanced computer projections, who would know that a week of summer fun in the Big Easy could soon be replaced by a hurricane-level storm – and right on the anniversary of the 2005 visit by Katrina!
The metaphor to the stock market is not easy to ignore. Like the calm before the storm, when the market goes through a week like this last one, market professionals fear that it suggests investor complacency and that bad news will follow, taking portfolios lower.
Like stock market investors, residents learning of an impending hurricane seem to take one of three courses of action. Some will just sit and wait – like the buy-and-hold investors. They're the ones most likely to get really harmed if this tropical storm becomes the next Katrina.
A second group simply gets out of town – they evacuate at the first sign of a threat. They are the most risk adverse and they will lose the least if their worst fears are realized. Yet how many warnings turn into false alarms? How many times can you uproot your life and run away? What opportunities are put on hold or, worse, lost in the bargain?
Finally, the most astute residents, I think, are those that stay abreast of the latest weather news, and prepare for the worst – taking all necessary precautions short of leaving to protect life and property unless official evacuation orders are received. They, too, incur some costs. They may board up their houses for the umpteenth time, and standing in line for supplies is no joy, but they can hunker down and survive most storms, while remaining flexible enough to exit if necessary.
These inhabitants are like active investors, monitoring the markets and maintaining defensive tools including the flexibility to exit the markets if the going gets too rough. They may give up some of the upside due to their defensiveness, but they're still there to reap most of the benefits when the markets soar.
Flexible Plan delivers these services to those who want to count themselves in the active portion of the populace – not buying or holding or simply market timing, but employing both, and more, as necessary to respond to the present market climate.
Another crisis may (will) surface in Europe. Earnings may turn lower rather than continue to climb. And the next ten economic reports may be worse than expected.
Yes, you want to enjoy the calm, the dog days of summer, but be prepared for the impending storm. "Oh, that it may not be premature!"
All the best,
I was saddened to hear of Neil Armstrong's death. As a child of the space-happy fifties and sixties, he was a personal hero of mine.
I like the quote my friend Dave Moenning reminded me of in his State of the Market's blog this morning, "Pilots like to be remembered for their flying and landing, not for their walking."
Neil Armstrong – a man who did not seek attention, but who left footsteps that will never be filled here and on the lunar surface. May he rest in peace, as the earth and moon so often appeared from his ship in the heavens above.
Election Year Update:
RealClearPolitics two-month average: Obama +1.1%
Average of Likely Voter polls: Obama +1.4%
On this date in 2008: Obama +1.8%
On this date in 2004: Bush +1.5%
14 Battleground State Polls (13 reporting - no new polls in Oregon):
RealClearPolitics two-month average: 10 Obama/3 Romney
Last State poll: 6 Obama/4 Romney/3 Ties (O, VA, MI)
Improving over average poll: 8 Romney/4 Obama/1 NC
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