S&P 500 Large Cap Index

As noted in our communication on Friday, October 5th, we were worried volatility would pick up – quite the understatement! The S&P 500 (which is an index of US-based large-cap stocks) broke its short-term trend line, the 10-day moving average, last Friday. It has further broken the 50-day moving average and trending toward breaking it’s 200-day moving average. These are all extremely substantial moves in the world of technical charting.

We focus on moving averages, and technical charts, as a way of identifying trends. Staying above moving average lines signifies strength or a strong uptrend. Falling below longer-term moving average lines signifies weakness or a strong downtrend.

The below chart depicts the volatility in January and February earlier this year. Although a fairly newsworthy event, you will notice did not break the green line or longer-term moving average (200 days). However, note the 10-day moving average is starting to cross below the 50 days moving average, and the price did, in fact, drop to the 200 on this most recent move.

stock chart

10 Day Moving Average – is the blue line on the chart above. This takes the last 10 days and averages them to smooth out the movement of the market. A 10-day moving average measures short-term trends. Typically, 2 to 3 weeks.

50 Day Moving Average – is the red line on the chart above. This takes the last 50 days and averages them to smooth out the movement of the market. A 50-day moving average measures medium-term trends. Typically, 3 to 6 months.

200 Day Moving Average – is the green line on the chart above. This takes the last 200 days and averages them to smooth out the movement of the market. A 200-day moving average measures long-term trends. Typically, 1 to 3 years.

Fear & Greed Index

The sentiment is one of the many indicators we pay attention to when we are looking at extreme volatility. If you look at the first picture, you can see that as of October 11, 2018, we are at extreme fear. The second picture gives us more information than where we are today – it shows how fear and greed has moved over time. The last time you saw this type of fear was at the beginning of 2018. Also, notice we came from about the same greed reading of 80. The reason we pay attention to this indicator is to give us an idea of how people are feeling so we can take a contrarian view.

This would cause us to be somewhat positive over the near term. The sentiment is not a great stand-alone indicator but, in conjunction with our risk signal, it gives us a good idea of when to be worried and when to be greedy.

fear and greed

MSCI EAFE Index – International

The international markets have underperformed the Us market so far this year, as you can see by the EFA chart below. The EFA is a representative of international developed countries. International markets broke under the 200-day moving average, the longer term trend, sometime in June of this year. (Remember the US broke its 200Day this most recent move). One of the big reasons for this weakness internationally is the strong dollar. We hedged the dollar out of our international holding late last year by buying HEFA instead of EFA. As you can see by the second chart, the dollar bottomed out at the beginning of 2018 and has trended up much of year. Lastly, if you look at the third chart (HEFA) you will see that it looks like a much stronger uptrend until the recent correction.

10 Year & 2 Year Bonds & Interest Rates

The rise in interest rates is most likely the spark that started this fire. The charts below are showing the 10-year treasury yield, 2-year treasury yield. These two charts are labeled as the $UST2Y (US 2 Year Treasury Yield) & $UST10Y (US 10 Year Treasury Yield). Both charts have been climbing over fairly the last two years. The 2 Year Treasury yield has been more consistent as it has moved up, but the 10 year Treasury yield has gone up in a more stair step fashion. Based on the previous move you would anticipate the 10 year Treasury to next move up to somewhere around 3.50%. Having a 3.50% yield on the 10 Year Treasury has been an area of concern for a lot of analysts.

We believe this is one of the major reasons the market is currently reacting negatively.

20+ Year Bond Prices

This recent stock market correction is causing more fear because fixed income has not offset any of the recent drawdowns. Not only have they not offset this drawdown – they have added to it. If you look at the chart below, you can see that bonds have dropped recently – this is directly correlated by the move up in interest rates. A generic rule of thumb, “when interest rates go up on bonds, the prices of the bonds go down”. This is an inverse relationship and one that we have been concerned about for several years.


Market volatility sparked by a rise in interest rates is a double whammy in a diversified portfolio. Both your equity and fixed income positions are coming under pressure together. International markets also taking it on the chin from both sides with an equity correction, and a rising dollar adds fuel to the fire. The only place to hide at this point is in cash.

To address the issues brought up in this commentary we have taken the following actions:
1. Hold very short-term duration bonds. Currently, that duration is around 1 year.
2. Hedge the US dollar exposure out of our developed international position.
3. Raised cash in the portfolio.

We will continue to monitor all these issues looking for areas of opportunity.
As always, we thank you for your business and your confidence in us navigating these markets.

Syntal Investment Team