August 7, 2019

The HCM-BuyLine Alpha has dropped, and we are watching it closely. We will reduce equity exposure if the markets close 3.25% below the HCM-BuyLine Alpha. This bull market is the longest running in history, and sooner or later it will end. As you can see from the chart below, there is no red warning dot, but it is very close. Again, we are watching the markets closely. Having a rules-based system is one of the only ways to keep emotions in check during times of volatility.

 08-07-2019 BLA

The escalation of China and US trade tensions surprised markets, leading to the vicious 3% sell-off on Monday and a 7% peak to trough drawdown. The obvious question: Are markets facing significant downside risk from here?

Here are some positive points to consider:

  • Following 3% 1-day sell-offs (since 2009), equities bottomed within days in most instances.
  • 1-month, 3-month, and 6-month gains averaged 4%, 8%, and 15% (win-ratio 70%, 87%, and 96%).
  • VIX term structure inverted to -2.7. During the last 5 out of 7 times (since 2011), markets bottomed within days.
  • The last 24 times the S&P was down 3% in 1 day (since 2009), equities were higher during the 3-month, and 6-month periods. With 87% and 96% win-ratio, those are very high odds that the market might have washed itself out.

The elevation of trade tensions between China and the US are serious, and the market’s knee-jerk reaction is understandable.  This sell-off has brought a renewed wave of advisors proclaiming the end of the business cycle.  Since 2009, this is the 24th time the business cycle has been declared to be ending, and yet, there have been ZERO business contractions in the US. 

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