Stock Market Poetry

What can we, as active participants learn from one of poetry's greatest minds?

The Dow Jones Industrial Average was first introduced on May 26, 1896 by two financial reporters, Charles Dow and Edward Jones. The index tracked the 12 largest companies and gave their readers a gauge of the overall health of the U.S. Stock Market. Four years prior to the publication of the DJIA, the world lost one of its most influential poets, Lord Alfred Tennyson. What can Tennyson’s words teach us about stocks? Well for starters, I do not believe Tennyson would be a believer in a primary component of Dow Theory; that being price discounts everything.

“For words, like Nature, half reveal
     And half conceal the Soul within.”

Dow theorists believe that the market discounts every known bit of information. This includes expectations, to the point that they are predictive of events. I believe Tennyson would argue that the averages only provide a mere outline of all known information, and that Industry’s true condition lies deeper than what the averages reflect through price. With that being said, I think Tennyson would be all for the concept of irrational exuberance; that being investor enthusiasm (whether supported by fundamentals or not) can melt up assets prices to levels where price contraction can become very steep and quite dangerous. I find that the below quote fits extremely well with irrational participant behavior..

“Theirs not to reason why, theirs but to do and die."

October 6th marks the 127th anniversary of Lord Alfred Tennyson’s death, and even though I’m a poesy nerd, I think everyone could benefit from reading his works. From the hopeless romantic to the dark depressive - Tennyson’s words truly stretch across time and can be applied to any industry.

“Knowledge comes, but Wisdom lingers.”

As Q3 comes to a close, I think it’s appropriate to cut the dead weight in our portfolios. The current news cycle (both economic and political) can add increased stress to investors. We are certainly in an age of information overload, but what percentage of this information are we actually retaining? What percentage should we even be paying attention too? I think it’s important we ask ourselves this as we continue down the final stretch of 2019.

“To strive, to seek, to find, and not to yield.”

Did someone say yield? Well, Value and High Dividend Yielding stocks are outperforming Growth and High Beta stocks from a QTD perspective. Low Volatility continues to outperform, primarily due to Utilities names establishing new highs.

“Let the great world spin for ever down
the ringing grooves of change.”

Our Risk on / Risk off gauge of Consumer Discretionary (XLY) vs. Consumer Staples (XLP) failed to make a new high, as the ratio remains in a downtrend poising itself for a retest of the 1.92 level.

Economic data was interpreted mixed this month, as the U-Mich Consumer Sentiment Index rebounded in September to 93.2 from a disappointing August (89.8). But the index fell -7.4% from last September’s reading of 100.1. Business Confidence can also be interpreted as waning, but these indicators are giving no clear signal as of yet.

Housing data this past week reflected a robust housing market with New Home Sales increasing +7.1% from the prior month to a seasonally-adjusted annual rate of 713,000 units. With the drop in mortgage rates, housing data is beginning to show signs of increased longevity.

We’ve seen this data be reflected in ETFs such as $ITB US Home Construction and $XHB S&P Home-builders. Both establishing new highs in late August and early September.

“Love is the only gold.”

Gold prices continued to outperform the broad market, but are coming into some resistance at ~$1,550 per ounce. The 14 period weekly RSI remains overbought ( > 70). Silver outperformed Gold in Q3, which is bullish for metals overall, but The Silver vs. Gold ratio is at a unique position. It would be encouraging to see Gold’s cohort continue to outperform in Q4.

With all the headlines as of late, we cannot forget we are only 2.3% away from all-time highs in the S&P 500. We may have witnessed rotation out of growth stocks and into higher dividend paying equities, but this isn’t something that happens overnight. We saw similar factor changes back in November preceding the December sell-off. If you were to begin betting High-Dividend stocks in December 2018, you missed quite the V-shaped recovery to start the year.

As I conclude this newsletter I’d like to leave you with a few words of wisdom from Lord Tennyson.

“No man ever got very high by pulling other people down. The intelligent merchant does not knock his competitors. The sensible worker does not work those who work with him. Don't knock your friends. Don't knock your enemies. Don't knock yourself.”

See you in Q4!!