Recent Investment Commentary {Part I}

I am posting in serial form this week a copy of a recent communication we sent out last week to friends of Lumen Capital Management, LLC.  Today is Part I.

Markets have basically gone nowhere in 2015. Stocks traded sideways for most of the year and then experienced a rapid decline in late August from which we’ve been clawing out of since. The S&P 500*, the most commonly measured market index; declined at one point about 12% from highs it set back in May. Many sectors, as well as emerging markets, fared worse.  Investors worry that the past few months suggest a change in the markets.  Here’s what we think.

Above, I’m showing you a chart of the S&P 500’s Exchange Traded Fund {Symbol, “SPY”}.  I’ve used yellow to highlight its earlier price range.  Stocks fell rapidly in August before churning around most of September.  We then completed a successful retest of the earlier lows by not trading below those earlier prices.  We have now recovered the entirety of that previous decline. While probability has suggested stocks could trade back into the range we’ve highlighted above, it is also likely they could struggle to move beyond this zone in the near future.  “Price has Memory” is an old Wall Street saying that suggests stocks will often trade to levels where investors have coalesced around certain prices.  As the yellow shaded area above illustrates, we now have month’s worth of investors who bought higher and carry losses. Theory suggests these investors may become sellers the closer prices move towards their original cost.  If that happens markets will likely need time as it attempts to trade through these bands of sellers.  In Wall Street parlance these levels are referred to as “resistance” when they represent overhead supply and “support” when these levels represent buyers at a lower price levels.  Clues to future direction will be garnered by how stocks react to these levels of support and resistance. 

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Part II will be posted tomorrow.