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Market Commentary

November 2018 Market Commentary

Feeling Grinchy before the Holiday Season

In our past commentaries we have talked about the 5-Step Uptrend Process.

There are typically five steps the market goes through in order to resume an uptrend. 

  1. The market is first oversold, which we saw at the beginning of this year. 
  2. It then displays positive divergences, which happened in the first and the second quarter of this year. 
  3. These two steps are then followed by a failed rebound which we have seen a few times this year and may be in one at the time of this writing (November 23, 2018). 
  4. The next step is a retest of the highs established in late January of this year, which has happened. 
  5. The final step in a successful resumption of an uptrend, is a breadth thrust on the upside. This is still missing. 

One variable of particular interest is that we not only had retests of previous highs but have exceeded the high established in late January. However, as we went past this high we never saw the enthusiastic buying similar to the selling we saw in January and February of this year. The rallies that took us where we sit today (at new highs on S&P Index 500), have been very narrow (lacking breadth) and apathetic (lacking an upward thrust and breadth*) which are not typical of a sustainable rally. Therefore, the rallies in February, March, July, and August failed to produce a breadth thrust signal to satisfy our urge to call the resumption of this uptrend that has been intact for almost a decade. And until that happens we believe that the equity market, particularly the U.S. equity market, will remain stuck between step 3 and step 5 in the 5-step bottoming process. 

In the absence of the upward breadth thrust and the market’s negative technical posture, we have made an allocation that reflects our opinion which turned mildly defensive over the short to intermediate term. We are also on track to have the first year with no asset class returning 5% in almost 5 decades. There are other market variables that are mood changing for us, aside from our quantitative models feeling Grinchy in the midst of this Holiday Season. Last year, the stock market had plenty of reasons to rip higher as we got tax cuts, fiscal stimulus, soaring home sales, while interest rates were relatively friendly. This year, not so much. There has been a wave of quantitative tightening, home sales have started to slow and there isn’t much hope for a fiscal stimulus with a split congress. Not to mention, the trade war with China has been escalating lately as well. 

The equity market can still resolve itself on the upside, but we need to watch the tape action over the next couple of months to be convinced. This is consistent with our opinion that we are in the midst of a secular bull market for equities but a wave of quantitative synchronized global tightening and other uncertainties’ mentioned above may be getting in the way of different asset classes.

The Investment Team recently reallocated and/or rebalanced the Adaptive Intelligence Models on the Solutions platform based on our current market outlook.

Allocation Highlights 

  • In the Conservative Income portfolios, we reduced exposure to Domestic Equity (Large Cap), Foreign Equity (Developed Markets), High Quality Debt and Alternative Fixed Income, and we increased exposure to High Yield Debt, Foreign Debt and Cash.
  • In the Conservative Growth and Income portfolios, we reduced exposure to Foreign Equity (Developed Markets), High Quality Debt and Alternative Fixed Income, and we increased exposure to High Yield Debt, Foreign Debt and Cash. 
  • In the Balanced portfolios, we reduced exposure to Domestic Equity (Large Cap), Foreign Equity (Developed Markets) and High Quality Debt, and we increased exposure to High Yield Debt and Foreign Debt. 
  • In the Total Return portfolios, we reduced exposure to Domestic Equity (Large and Small Cap), Foreign Equity (Developed Markets) and Alternative Fixed Income, and we increased exposure to High Quality Debt, High Yield Debt and Foreign Debt. 
  • In the Appreciation portfolios, we rebalanced to the current asset allocation targets. 
  • In the Growth portfolios, we reduced the exposure to Alternative Fixed Income, and we increased exposure to Domestic Equity (Small and Mid-Cap). 
  • In the Absolute Return Portfolio (ARP), we reduced exposure to Domestic Equity (Large Cap) and Foreign Equity (Developed Markets), and we increased exposure to Foreign Equity (Emerging Markets), High Yield Debt, and Foreign Debt.

Unless something has changed with your investment time horizon, objectives and risk tolerance, there is no compelling reason to change your investment discipline or your portfolio at this time. We believe investors who stick with their investment strategy and maintain a diversified portfolio are prepared for future market shocks and are well positioned for market hits.

*Breadth thrust is a technical indicator used to ascertain market momentum and signals the start of a potential new bull market after what may have been an oversold market. Source: NDR

Shashi Mehrotra, Chartered Financial Analyst, is the Chief Operating Officer and Chief Investment Officer of Legend Advisory. The opinions and predictions expressed herein are those of Shashi Mehrotra solely and not necessarily the opinions or expectations of Legend Advisory or any of its affiliates. Such opinions and predictions are as of November 23, 2018, and are subject to change at any time based on market and other conditions. No predictions or forecasts can be guaranteed.

Current market and economic data is as-of November 23, 2018. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

Important Disclosures and Definitions

Investing involves risk including the potential loss of principal. The opinions and material presented are provided for informational purposes only. No person or system can predict the market. Neither asset allocation nor diversification guarantee a profit or protect against or eliminate the risk of experiencing investment losses. All investments are subject to risk, including the risk of principal loss. There is no assurance that the investment goals and process described herein will consistently lead to successful investing. 

The information shown does constitute investment advice, does not consider the investment objectives, risk tolerance or financial circumstances of any specific investor. The information provided is not intended to be a complete analysis of every material fact respecting any portfolio, security, or strategy and has been presented for educational purposes only. Data obtained from the sources cited is believed to be reliable and accurate at the time of compilation. 

Past performance is no guarantee of future results.

The S&P 500 Index is a capitalization weighted index of 500 of the largest exchange-traded stocks in the U.S. from a broad range of Industries whose collective performance mirrors the overall stock market. Capitalization weighting results in the larger components (stocks) carrying a larger percentage weighting. The Equal Weighted S&P 500 consists of the same stocks but equally weighted and consequently may provide insight into the breadth/disparity of market performance. Investors cannot invest directly in an index. 

There are some risks associated with investing in the stock markets: 1) Systematic risk - also known as market risk, this is the potential for the entire market to decline; 2) Unsystematic risk - the risk that any one stock may go down in value, independent of the stock market as a whole. This also incorporates business risk and event risk; and 3) Opportunity risk and liquidity risk. 

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed-income security sold or redeemed prior to maturity may be subject to loss. 

Alternative Fixed Income – (Alternative Investment) are intended for sophisticated investors and involve a high degree of risk, including the potential for loss of some or all principal. When considering alternative investments, you should consider various risks including the fact that some alternative investment products provide limited liquidity and include, among other things, the risks inherent in investing in securities and derivatives, using leverage and engaging in short sales. An investment in an alternative investment product or strategy is speculative and should not constitute a complete investment program. A variety of alternative investment strategies may be utilized in the portfolio. Each strategy carries its own unique risks, which are more fully explained in the applicable product prospectus. Please read the prospectus carefully before investing.

Cash Equivalents include U.S. government Treasury bills, bank certificates of deposit, bankers’ acceptances, corporate commercial paper, and other market instruments. A money market fund is an investment whose objective is to earn interest for shareholders while seeking to maintain a net asset value (NAV) of $1 per share. A money market fund’s portfolio is comprised of short-term, or less than one year, securities representing high-quality, liquid debt and monetary instruments. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Foreign Debt – A foreign bond is a bond traded in a given country that was issued by a foreign government or company. The foreign bond market trades in the domestic currency and is regulated by domestic regulators.

Foreign Equity - Issues floated by foreign companies in the domestic equity market.

High Quality Debt - (Investment Grade Bond) - Describing a bond with a medium or high rating. Bonds rated Baa3 or higher by Moody’s or BBB- or higher by S&P or Fitch. Investment-grade bonds are considered sufficiently low-risk that the law allows banks to invest in them. In addition to being low-risk, investment-grade bonds are low-return, greatly reducing the cost on the issuer. Most American Treasury and municipal bonds are investment-grade.

High yield bonds entail higher risks, including greater credit risks. Their values are sensitive to interest rate movements (a rise in interest rates can result in a decline in value of the investment). High Yield bonds are often called Junk bonds and may carry a rating of ‘BB’ or lower by Standard & Poor’s, or ‘Ba’ or below by Moody’s. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

Large Cap Funds - Large Cap refers to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term “large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. 

Mid Cap Funds - A mid-cap fund is a type of stock fund that invests in mid-sized companies. A company’s size is determined by its market capitalization, with mid-sized firms generally ranging from $2 billion to $10 billion in market cap.

Small Cap Funds - Small cap stocks may be subject to a higher degree of risk than larger, more established companies’ securities, including higher risk of failure and higher volatility. The illiquidity of the small-cap market may adversely affect the value of these investments so those shares, when redeemed, may be worth more or less than their original cost.

Securities offered through Lincoln Investment, Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Legend Advisory, Registered Investment Adviser. The Legend Advisory portfolios described are offered as part of a discretionary advisory service. Legend Advisory will assess an annual investment advisory fee based on the value of assets in your Legend Advisory account(s). Additional information regarding Legend Advisory’s investment advisory fees can be found in the firm’s Form ADV 2A Appendix I, which is available upon request.

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