Weekend Reading: October Exposed The Passive Problem

I have written about the “problem with passive” previously which mostly fell on “deaf ears.” Such should not be surprising after one of the longest advances in market history with virtually no volatility in 2017.

However, as they say, “payback is a bitch.”

This year started off with a January rush higher followed immediately by a 2-week sell-off that wiped out the entire advance. But then it was over, and the market began to stair step higher ultimately reaching all-time highs.

Once again, the “buy and hold” and “passive indexing” mantras were seemingly proved right.

And then the month of October arrived and stocks plunged more in one month (-7.4%) as compared to the decline from the closing highs in January to the lows of March (-6.5%). (As noted, it is important that November musters a fairly strong rally to keep the monthly MACD sell signal from triggering. Such would denote a much more negative backdrop for stocks in the months ahead.)

Over the last couple of months, we have repeatedly warned our readers that a pickup in volatility in October was highly likely due to the strong advances made by the markets during the preceding summer months. At the beginning of September I penned:

“However, there are plenty of warning signs that the “good times” are nearing their end, which will likely surprise most everyone.”

Then I reiterated that point two weeks later. To wit:

“While we are long-biased in our portfolios currently, such doesn’t remain there is no risk to portfolios currently. With ongoing “trade war” rhetoric, political intrigue at the White House, and interest rates pushing back up to 3%, there is much which could spook the markets over the next 45-days.”

The chart below only shows months where the market lost more than 5%. You will notice clusters of losses during the centers of major bear markets such as 1974, 2000, and 2008.