The Word from Main Street

Market Update for the Week of March 27, 2023

To say that the U.S. stock market has been volatile recently would be a major understatement. From March 6th through March 10th, the S&P 500 (SPX) was down more than 4.5% in the wake of the Silicon Valley Bank Collapse. The following week, SPX gained more than 1.5% as worries eased, meanwhile, the Nasdaq 100 (NDX) was up 5%. On Wednesday, March 22nd, SPX went from being in the green to finishing the day down more than 1.5% after selling off in the final hour of trading following the FOMC meeting and comments from Treasury Secretary Yellen. On Thursday, the index rebounded and was up more than 1% in early trading only to be back in the red in the afternoon, before ultimately finishing the day up around 0.40%.

Although we haven’t had any days this year that rank among the “all-time” list, we thought this would be a good opportunity to provide an update on Nasdaq Dorsey Wright’s study that looks at the effect of missing the most extreme days in the market and how these days tend to be clustered together.

At one point or another, most of us have been told that a small number of the best market days account for the lion's share of any given year’s return. And therefore, the theory goes, investors should be always invested to avoid missing these days, and the occasional sharp downturn is just a fact of life. Purveyors of this sentiment seemingly view these extreme days as unconnected events in a vacuum. But, actually, the best days often occur in close temporal proximity to the worst days and therefore, if one were to miss the best days, one might also miss the worst days. The image below shows the best and worst days for the Dow Jones Industrial Average (DJIA) since 1985.

Source: Nasdaq Dorsey Wright

So, is there any truth to the “best days” theory? If the good days and bad days are clustered together, would we be better off if we missed these whipsaws altogether? To answer these questions, Nasdaq Dorsey Wright has examined a few hypothetical scenarios. The first is simply buying and holding the Dow from 12/31/84 – 2/22/23, which would have returned 2,544%. The other three scenarios are summarized below:

Missing the Worst 20 Days ~ In the green table below, the concept of perfect market timing and side-stepping just the 20 worst-performing days in the DJIA was applied. No doubt about it, the performance would have dramatically improved to the tune of more than 11,000% better than the buy-and-hold option. In other words, a $100,000 initial investment would have grown to nearly $14 million since 1985.

Missing the Best 20 Days ~ Taking it to the other extreme, what if you had the bad luck to miss the 20 best historical days in the Dow? In the red table below, you'll find that missing out on the best days, but still suffering through the worst, resulted in an underperformance of approximately 2,000% over the last 38+ years.

Missing Both the Best 20 & Worst 20 Days ~ Realizing that these extreme days typically come in close proximity to one another, what would happen if you were to miss both the best 20 days and the worst 20 days? Interestingly, side-stepping all 40 of these days provides a better return when compared to simply buying and holding. This hypothetical portfolio would be up 3,687%, outperforming the buy-and-hold scenario by more than 1,200%.

Source: Nasdaq Dorsey Wright

So, what does all of this mean to an average investor? What good does it do knowing that the most extreme days are clustered together and that, historically, you’ve been better off if you missed both the best and the worst of them? Well, the most volatile periods have tended to come in down markets. This begs the question “what is a down market?” Some have quantified it using moving averages; another way to quantify it is using the NYSE Bullish Percent (BPNYSE) indicator.

From our perspective, the 30%, and below, level has been looked at as the “green zone” on the BPNYSE and we have historically seen some of the best buying opportunities come from below the 30% level. However, trips to these levels are often uncomfortable. One way to quantify the “uncomfortable” nature of the markets while the BPNYSE is at or below 30% is simply by looking at the market's standard deviation (volatility). For starters, going back to February 1997, the BPNYSE has only spent about 5% of the time at 30% or below, while the BPNYSE sits between 30 and 70 a little more than 70% of the time.

While the bulk of the past 23-plus years has been spent between 30% and 70%, a large portion of the volatility has come while below the 30% level. When the BPNYSE is between 30% and 70%, the annualized standard deviation (volatility) of the S&P 500 has been 17.51%; however, while the BPNYSE has been below 30%, the standard deviation has been 51.80%...about three times as high. We can also see that the "up days" outnumber the "down days" when the BPNYSE is in the 30-70 or the 70+ level, but when the BPNYSE is below 30, it's an even split.

Source: Nasdaq Dorsey Wright

It may be hard to reconcile the idea that the BPNYSE being below 30% is a highly volatile state for the market, but historically, it has also offered some of the best buying opportunities. As the saying goes, “the time to buy is when there’s blood in the streets” and blood in the streets means panic, which means volatility. Of course, it is preferable if you’ve managed not to be one of those bleeding. At this point, the BPNYSE indicator sits in the mid-30s. Not quite in the sub-30 range that produces the highest levels of volatility, but it’s not surprising that we’ve been experiencing above-average volatility with the indicator sitting just outside that range.

We continue to maintain a high level of Cash/Cash Alternatives in our Tactical Trend Strategies and have been making adjustments to the sectors we own, removing Oil & Gas and Financials, and adding Semiconductors and Consumer Discretionary. Within the DALI indicator, we are closely monitoring the relationship between Domestic Equities (U.S. stocks) and Commodities (agricultural, energy, metals, livestock).

The current reading for the Nasdaq Dorsey Wright PR4050 Cash Trigger is: Money Market = 38.03% & U.S. Equity Core = 90.85%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, Money Market must be 50% or above and U.S. Equity Core must be 40% or below.

Source: Nasdaq Dorsey Wright

Below is the most recent DALI (Dynamic Asset Level Investing) Indicator showing International Equities maintaining the lead over Cash, while Domestic Equities and Commodities continue to battle for third place.

Source: Nasdaq Dorsey Wright

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Main Street Wealth Advisors
33801 1st Way South, Suite 271
Federal Way, WA 98003
Office: (253) 944-1047
Fax: (253) 944-1075
www.mainstreetwa.com

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LPL Financial did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of LPL Financial or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Past performance is no guarantee of future results. All investing involves risk including the loss of principal. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.

Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.

Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical, and quantitative opinions may not be in concert. Any opinions expressed or implied herein are not necessarily the same as those of LPL Financial or its affiliates. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for informal purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of 3/24/23. Additional information is available on request.

Nasdaq Dorsey Wright’s “DALI" employs relative strength-based analysis to rank macro asset classes based on developing leadership trends within the global capital markets. The objective guidance within DALI provides the tools necessary to properly allocate portfolios across all major asset classes in an effort to emphasize strength wherever it exists. Domestic Equities, International Equities, Commodities, Currencies, Fixed Income and Cash are evaluated daily to identify dynamic developments across investment genres, as well as within them. This tool provides the tactical precision that allows investors to adapt as the market leadership changes.

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