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Wells Fargo Advisors Market Commentary

A weekly commentary on the market from Wells Fargo Advisors.

February 7, 2018

Scott Wren, Senior Global Equity Strategist

For Now, the Traders are in Control

  • When markets experience panic and massive volatility, price levels can dramatically differ from what the underlying fundamentals would suggest.
  • Downside volatility represents opportunity. Be more nimble. Pick your spots and put sidelined funds to work.

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Global equity markets have been fluctuating wildly in recent days (and recent hours). The S&P 500 Index has dropped 8% in just a matter of days. Are you fearful and seeking shelter, or assertively looking for opportunities? If you are like most investors who don’t manage other people’s money for a living, you have probably been sitting on more cash than you liked as the market rallied to one record high after another over the course of the last 18 months and the fundamental outlook improved. You might have even been underinvested in stocks over much of the last eight years of this monster run higher in the market. You have largely been skeptical.

But when opportunity knocks, as the old saying goes, you need to open the door. We are hearing that knock now, in our opinion. We have talked repeatedly over the years—and certainly during this rally—that investors, especially those underinvested in stocks, need to have a plan that will allow them to take advantage of pullbacks in the equity market. You don’t want to start thinking about a plan of action when the correction happens; you want to do it in advance. Preferably well in advance. Where are the holes in your portfolio? What are the most attractive sectors looking ahead given our economic expectations? How about just buying some broad exposure to the market?

We thought 2017 would offer at least one opportunity to take advantage of a 7% or 8% correction, but it never materialized as the market kept grinding higher throughout the year. Now we have an opportunity. The question is this: Do investors have a plan? If so, it is likely time to start executing that plan. In other words, we believe it’s time to pull the trigger and start stepping into stocks. But where? At what levels? One thing this strategist can tell you with a high degree of confidence is that I will not be able to pick the exact bottom. But my goal is to look for spots to buy that offer some level of technical support that traders are likely watching.

Technical support? You mean those lines drawn on price charts? Yes we are talking about those lines. And yes, we are a fundamentally focused research department, but when panic sets in and equity market volatility soars, you need to look past earnings projections and price/earnings (P/E) ratios. Over time, the fundamentals drive the market, but in the short term, anything can happen. Over the course of a cycle, the stock market, from time to time, becomes detached from the fundamentals. Traders often, if not daily, use technical analysis to pick their entry and exit spots in the short term. And right now, investors need to think a little more like traders.

For this strategist, the initial price level where the market may find support (levels at which our technical analysis anticipates buyers outnumbering sellers and prices stabilizing) is the range dictated by the 100- and 125-day moving average (simple price averages for the given number of trading days). At the time of this writing, that range falls roughly in the 2600 to 2630 level in the S&P 500. Frequently more important to traders is the 200-day moving average, which currently stands in the 2535 area.

For now, in this strategist’s opinion, investors need to be more nimble and lighter on their feet. Because for now, the traders are in control.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Technical analysis is the practice of using recent and historic price performance to anticipate future price moves, which may increase the odds of successful entries into and exits out of different markets. There is no assurance that these movements or trends can or will be duplicated in the future.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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