News versus Data

As you know, occasionally during our regular readings we come across material that is so on point and so well written that we feel compelled to share it with you in its entirety. Below is an article which addresses the very common issue of investing based on news headlines versus investing based on technical and fundamental data. This is one of the key principles that RiverTree covers repeatedly in our client communications. Please take a few minutes and read and ponder this commentary by Raymond James Research. 

Hopefully you enjoy it, and as always we welcome any feedback you may have.

"Bad News"

"Well, if you are basing your investment decisions on news headlines, it's probably time to sell out of everything and go hit your favorite vacation spot for the foreseeable future (actually, if you are basing your investment decisions on news headlines, it's probably time you give your money to someone else to manage, but I digress). In doing my daily rounds across the Internet yesterday, I found it very difficult to find a positive headline on the major business sites, which was to be expected on a day that saw the S&P 500 slice through its 50-day moving average on its way to a 0.41% loss. And I wasn't alone either, as one Raymond James home office associate even sent me a screenshot of a financial website that contained not a single modicum of good news.

Early morning futures and a strong opening initially pointed toward a favorable session, but the jovial mood was quickly deflated by the combination of a poor ADP employment report, the announcement of weaker-than expected U.S. productivity for the 1st Quarter, and, most importantly, a statement by Federal Reserve Chairperson, Janet Yellen, admitting that stock valuations were "quite high." Ms. Yellen was answering questions at an International Monetary Fund conference, and, while it may not have been her intention to shake up the equity markets, traders jumped all over her dreary declaration and started selling. Of course, shortly afterward the headlines began to pop up everywhere, propagating her condemnation in bold letters to the world and accelerating the pace of questions into my inbox. The strong words make for good reading (and give me a topic to write about), but I'm not sure how much of a news flash this actually was. It is not exactly a secret that many common valuation metrics for the market (like the S&P 500's P/E ratio) are above long-term averages, but let's not confuse high valuations with overvalued valuations. There is no rule demanding that the market revert to its mean whenever it gets extended one way or the other, so as I have repeatedly stated, we should be letting the charts dictate our investment decisions instead of ominous prognostications and fears.

And right now, we are still very within reach of all-time highs and may even get another rally attempt here. Despite all the negativity yesterday, the last hour of trading actually saw the S&P 500 bounce off of its 100-day moving average, which sits right at the lower end of the ascending triangle that has contained stocks over the last few weeks. So, while I always recommend vigilance and keeping an objective market opinion, reports of this Bull Market's death have been greatly exaggerated (for now at least). However, investors in oil-related assets may want to proceed with caution. The commodity put in a bearish reversal day yesterday, falling almost $2 from its high to close near its low for the session. That is typically not good trading action, and with the run it has been on recently, it would not surprise me to see some sort of pullback in the near term."