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Market Commentary: Will there be a fall correction?

Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group

This past week was filled with public statements on both domestic and international stages, and President Trump, Congress, the Fed and “The Rocket Man” likely will have more to do with whether we get a full fall correction this year or not.  From Trump and “The Rocket Man,” to yet another potential healthcare overhaul attempt, tax reform, the unwinding Fed balance sheet and geopolitical risks on various fronts – these could potentially be real issues that could derail the current bull market, if that is going to happen this year.

Despite these risks, which honestly have persisted for a long time, market technical indicators remain bullish so far. This is especially amazing since there is only one year on record that has had a smaller market drawdown than 2017 has year-to-date – and that was 1995.

To date, the biggest drawdown of 2017 (measured from a market top to bottom of a market move) was this spring and our leading indicators at the time were negative. However, the market resumed its upward move by May. The small pullback from August 7-18 of this year was only 2.23%.1

2017 could be a record if the market makes a new high after November 9th this year. We really are in a unique market that may just continue to chug upward through the end of the year.

This chart shows both bull and bear markets and how many days are normally measured between 5%, 10% and 20% corrections.

Chart Source: Ned Davis Research (1)

 

It is important to understand that these numbers need to be put into context. That context is that nearly every measure of markets by a technical measure are bullish. Even if markets cross any thresholds this final quarter of 2017, they should be viewed in the context of an ongoing cyclical bull market. If the leading technical indicators become negative, that could be the sign of a change.

Some of those issues could become very real in 2018 if year over year earnings growth peaks or we get an earnings recession. Markets tend to do well during Fed tightening cycles after prolonged periods of very low interest rates, and it does tend to get choppy after the Fed completes a normalization. Based upon the Fed’s current trajectory of rate hikes, it could be some time before we reach normalization at 3%.

Currently, CME Group’s FedWatch Tool has the likelihood of the next rate hike in December. Here is what those probabilities look like.

 

Chart Source: http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

 

With strong market breadth, monetary policy still far from normalized, and if we can avoid realizing the very serious geopolitical threats, markets do in fact look poised to continue to march onward for a bit longer.

It is always good to have facts to keep the gut feelings in check. If it seems like this bull market is long, it is. The important thing to remember is that although we do observe some cyclical elements in the market, they are not exact in how they play out and one data point in isolation can be misleading. That is why we are committed to looking at all the facts: the technical indicators, Fed interest rate cycles, stock prices, politics and corporate earnings do tell tales. For now, it looks like the story unfolding is one of potentially a new record and likely a strong ending to 2018.

 

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Citations

1- Was That the Correction? Five Stats to Consider. Ned Davis Research Group. September 19, 2017

Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-566

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