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Weekly Economic and Stock Market Commentary: September 26, 2022

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As for the stock market specifically:

Let’s go through some cliches to start the week.

First, figures don’t lie, but liars figure.

Sell on Rosh Hashanah, and buy Yom Kippur.

Most importantly, SOMETIMES, THE CURRENT BULL MARKET IS CASH.

For the record Rosh Hashanah was this past weekend, and Yom Kippur is around the corner.

While there is some evidence of success trading according to the Jewish New Year and Holy day, the indicators I utilize paint a far different picture this year. At this time, we are below the trendlines on the major market averages, and relative strength favors other assets compared to stocks. In addition to that, the major market averages made sell signals in a negative trend. That is something to take very seriously.

Once again (fee-based/advisory accounts), I started raising cash in January and didn’t believe the year would become what it is. I raised more cash in March. Once again, I didn’t believe the market would become what it is.

We all wish I raised more cash. At this point, the moves I make will be based on individual position conditions instead of an overall large-scale move.

Why did I raise that cash? Because my research said there was an unfavorable risk-to-reward ratio. I sold it down to the point that my research could support it.

Last week we looked at what happened when a portfolio was hit with a hypothetical 10% decline at ages 55 and 60.

This week I want to look at something a bit different.

In this week’s scenario, a person/couple who has $500,000 on January 1st and is invested 60/40 between stocks and bonds. This person/couple contributes $25,000 per year to the account on December 31st each year.

Just suppose the stock portfolio declines 25% for the year, and the bond market ends even for the year.

In this example, the $300,000 stock account value becomes $225,000 before the contribution on December 31st, and the $200,000 in bonds remains. Overall, the portfolio lost $75,000 or 15%. The contribution of $25,000 brings the value back to $450,000, or 10% below the beginning value.

Next week I intend (weasel word) to look at the impact of negative compounding.

This week we get the saga of the imminent government shutdown. I am sure “our friends in Washington” already have the final temporary budget ready to go – with plenty of garbage spending. However, sending it now to the President for his signature would deprive them of an opportunity to replay the junior high drama play. The bad news is that we likely will get to see this horrible play again within the next six months.

The main risk assessing bullish percent indicators each had rough weeks. They weren’t as bad as what we experienced in the fall of 2012, but we don’t need to try for a new record. We are very oversold at this time and typically would be looking for reversals up to push some chips back onto the table. However, with equities ranked #3 (out of 6) macro asset classes, I wouldn’t push too many chips on the table at one time.  For now, we shall continue with WEALTH PRESERVATION.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of September 23, 2022 (Courtesy Dorsey, Wright, and Associates).

On a general note:

The Federal Reserve met last week and decided to raise short-term interest rates by 0.75% in an attempt to reduce the inflation rate. This was the third consecutive increase in that amount. Going back to the cliché festival that started this week’s letter, another one regarding raising interest rates is “Three stumbles and a fall.” The meaning of that is the economy tends to fall once the Federal Reserve raises interest rates in three consecutive meetings.

The National Association of Realtors announced August existing home sales fell by 0.4% to a seasonally adjusted annualized rate of 4.8 million units. The drop in August was the seventh monthly decline in existing home sales. The August sales volume was 19.9% below the volume of August 2021 and was the weakest sales rate since May 2020. The report I saw did not provide sale price information.