April 30, 2014
We had been expecting a correction or pullback in the markets in the September and October time frame. What we didn’t expect was how volatile the correction was going to be. The month of October saw two very different directions for the markets. The first half was almost straight down, followed by nearly straight up the last half of the month.
The market moved down very fast and got to a point of being extremely oversold around the 15th of October. From a statistical standpoint the market was more than 130% oversold. This level has not been reached very often and in the case of the S&P/TSX Composite Index it was last reached in July of 2011 during the European Debt Crisis.
Economically, various data points in North America continue to improve. A drop in energy prices falls right into consumers’ pockets. For every $0.01 drop in gasoline prices it puts $1 billion dollars into consumers’ pockets. With gasoline dropping from a June high of $1.43 to the current $1.18, it is no wonder consumers are feeling confident. In fact the University of Michigan Consumer Sentiment hit a level last seen in 2007.
While corrections are never fun they do serve a purpose to remove speculators and weaker investors from the markets. With our indicators all turning positive in the middle of November, we can now look ahead with less concern. Historically we are entering the seasonally strongest period from the last week in October to the middle of May. We are also in the third year of the USA Presidential Cycle. The third year has historically produced the strongest returns of the 4 year cycle. After the correction in September and October the historical pattern has been strong markets for the months ahead.
2015 is just 6 weeks away and the middle year of the decade has important returns attributes. Years ending in 5 have historically been a very positive years. Since 1900, years ending in 5 have produced an average return of 29% for the Dow Jones Industrial Index.
With the correction behind us, it now looks like we may have positive investment patterns from now until May.