Market Commentary for December 2018

"Turned around and the good news... "

By Alan Hull

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

Finding the current market conditions frustrating? You're not alone...

At the beginning of November I was slightly bearish, but during the course of the month I got completely turned around. So I was cautious at the start but as we got past the U.S. mid-term elections, the U.S. stockmarkets celebrated with a relief rally. Of course we followed their lead. And below is a chart of the SP500 index showing the technical picture we were looking at just after the mid-terms....

So here we were with the October low and the U.S. mid-term elections in our rear-view mirror and a near perfect technical set up. So a Christmas rally was now looking highly probable and I entered both the Australian and U.S. markets. But alas, the best laid plans of mice and men, as the U.S. markets immediately went into reverse...

I did not see that coming. The medium term channel has been breached and the SP500 has now made a lower low on a weekly basis (the hallmark of a down trend). What's more the volatility that I expected to dissipate as we moved into Christmas, has actually gotten worse. In fact the NASDAQ index traded across a range 4.5% two weeks ago, 5.8% last week and 5.1% in the last three days! And just to rub salt into the wound after I moved to cash, Stockmarkets have bounced back up...

So what do we do? We wait and watch. Trading in the current conditions is a lottery. Markets are experiencing very high day to day volatility. What's more, I use stop losses and they don't work in volatile markets. But the idea of trading without stop losses is not an option because they are the cornerstone of quantitative risk management. And whilst I have been turned around over the past month, my losses have been minimal.

The good news is that volatility occurs in clusters and therefore we know it will dissipate as we move forward into 2019. So 2018 has been a transitional year (read: sideways and volatile) and 2019 is set to be a return to a trend.