We are now in the final quarter of 2018! I don’t know about you, but that seemed to come very quickly. The ability of time to speed up never ceases to amaze me. I still like to look forward to the end quarter each year.
It can be an exciting time, and it is typically one of the strongest market performance seasons. Typically, the final quarter marks the beginning of the biggest season to be invested. Historically that has been measured to be the November or December low to the highs the next March of April.
Astoundingly, that number averages 13.6% when looking at the Dow from 1900 through the end of 2017. Of course, risks always exist and these things shouldn’t be taken in isolation. Nevertheless, this data could indicate that we may be entering a typically great investing period.
Heading into the final quarter of 2018, we have some nice momentum in the markets. That could help lend some confidence to the argument for more good things from the stock market. To examine momentum, we can look at several things, but one thing that I like to look at is what can be referred to as a demand/supply spread. If that sounds like your high school economics course, you have a good memory. It certainly has similar names. When we look at a technical demand/supply spread, what we are talking about is volume in the market, or the number of shares changing hands on a given day.
The way we normalize that data is to assume all volume for a given day is positive demand when the market is rising. It is negative supply when the market is falling. That can then be smoothed out as a 4-day moving average to make it easier to digest, and get rid of some of the noise sparked by various headlines that might generate over reactions.
This is then modeled, and we can see more clearly whether there is more demand for investments than supply. That would indicate that there is strong momentum in the market. If there is more supply than demand, there are fewer willing investors in the market and there is often weakness observed in the market.
Basically, when the volume demanded is greater than the volume supplied, prices rise, and markets do well for investors. The most current readings of this points to strong demand and can be viewed as momentum going into the final quarter.
Certainly, there will be more headlines, more trade talk, more political banter; all of which likely will create daily drama for the markets. However, when we look from a higher level it is nice to see that we very likely can look forward to the coming seasons.
It is almost time for us to roll back the clocks, have cooler evenings and mornings, and look forward to spending quality time with family this holiday season. I also like to smile, knowing that this can often be a great time in the markets.
With strong current economics most of our current risks are in the trade and political arenas. We are keeping a close eye on those items as well for any signs of cracks.
Happy 4th quarter of 2018! I hope it is a great one.
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