2018 Annual Round-Up; — Wishes are for Rat Brains – Be the Red Stripe Zebra!

Hey Folks, I hope you all had a wonderful year end holidays with family and friends. Now we are back for another new trading year where we prepare for the coming twists and turns price action will no doubt cast upon us!

I wanted to just quickly recap for you my thoughts on 2018 below and then you can enjoy my video update.

• 2018 brought many surprises – it came in very strong and then quickly pulled back over 10% with the VIX briefly seeing the 50 level as Volatility imploded and XIV liquidated and forcing other ETN sensitive instruments to readjust their degree of risks…however little technical damage was done to most stocks and the markets quickly rebounded and moved higher until the end of Sept before pulling back and putting most Indexes into a Bear Market…and this time a lot of technical damage was done…Volatility came back in force this time but not to the elevated levels seen in February, but enough to force margin calls and a complete reallocation of money…2019 could be a year where Return of Capital takes on more priority than Return on Capital…
• For the 4th Qtr. of 2018 many records were set; –we saw the single biggest point gain in the DOW of more than 1,000 points and the S&P but also saw a record December being the worst month since 1931…we also saw over $4 Trillion in value (20% of the US GDP) wiped out! From one week to the next, we’ve seen wicked swings in price action; decades old records set with limited liquidity allows prices to get pushed around to extreme levels…and for the Quarter it is the worst performance since the financial crisis of 2008! And adding to the frenzy was Hedge Fund and Mutual Fund redemptions. Tax Loss Selling and Pension Fund re-balancing…for the 2018 Year End the DOW was off 5.6% (worst since 2008), the S&P was down 6.2% and NASDAQ was off 3.9%…
• Thus far, we are finishing off the worst 20 years for compounded returns since the Great Depression in 1929…The average CAGR since 1928 is about 10.7% but for the past 20 years we’ve seen the markets return 5.52% so we are running below the nominal average rate so investors can view this optimistically…But it will take new innovation and new companies to lead the way forward…and in this era of very cheap capital, Stock Buybacks have accounted for about 1/3 of the total S&P Gains since early 2011 financed by zero interest rates….By reducing the number of shares outstanding stock buybacks have a way of inflating EPS while masking underlying profit growth fundamentals…we should not assume this will continue as the cost of capital increases…
• Even given all this wild craziness in Q4 we must understand what really drives these Volatile moves; — it is simply Economic Uncertainty! From China Trade Tariffs, the appearance of an overly Hawkish Fed Reserve and slowing Global Growth…The S&P Forward PE Ratio now sits at 16.01 which is off over 25.79% from the highs at the end of 2017…many will interpret this as a great opportunity to acquire great stocks at much lower prices and setting up for longer term growth while others feel we can see further downside given the state of Global Play at the moment…
• We do have plenty of worries on the table to keep the Bulls very nervous and the Bears happy; –Global Growth is now projected to be anemic in 2019 with fears heightened of a possible Recession across the 19 countries that make up the ECB (GDPs moving lower and consumers spending less is a toxic cocktail for a massive hangover)…And let’s not forget the China Trade Wars which, if miscalculated, could move the markets another 15% lower…and finally the FEDs could pull the rug out from under the US Economy as well with higher rates and Quantitative Tightening taking more liquidity out of the markets…
• Money has rotated from momentum FAANG Stocks and Technology towards safer harbors like Utilities and higher dividend players, and we’ve seen a good deal of the new sectors like Communication and Real Estate outperform the more traditionally oriented “risk on” sectors like Cyclicals and Technology…

Don’t Be A Rat Brain Trader — Trade Smart !!
hpb