The first quarter of 2018 was a significant turning point for the market. The most obvious change was that the DJIA was down more than 2% in the quarter. That was the first negative quarter since June 2016, and the worst performance since September 2015 when the DJIA was down 9%.

The market started the year with a continuation of the one-day action that had been so common for so long. News headlines seemed not to matter with the primary driving force being “fear of missing out.” Conditions changed at the end of January when the ‘short volatility’ trade suddenly unwound. Market players were caught by surprise and were whipsawed by this sudden shift in volatility, sending the major averages down more than 10%.

The market is undergoing its longest and deepest corrective action in about two years. The selling is not only being driven by headlines about valuations, interest rates, political problems and trade wars, but by ugly technical action. For a very long time the bears were constantly trumpeting the reasons for this market to move lower and none of them mattered. The market ignored all of Trump’s behavior that was driving his critics crazy, and even issues like nuclear testing by North Korea had no impact. Any bad news was simply a reason to buy.

Since the end of January, that dynamic has shifted. The price action is no longer just an opportunity for entry points. It is reflecting some real uncertainty and there is no longer this attitude that any negatives will be overcome rather quickly. A trade war with China is the easy headline but a bigger part of the problem is rotational action and a lack of leadership. The big cap FAANG (Facebook, Apple, Amazon, Netflix, Google) names were the easy trade for a very long time but they have lost their luster and now market players are confused about where to go to next. No sector, not even a defensive group like gold, has emerged as a new leader. Ironically, interest rates still have not mattered much. There was some fear that the Fed would start to matter more but its maintained a more dovish a bias than many anticipated and has not been a factor.

The market now heads into a weaker time of the year and has a difficult technical setup to deal with. Second quarter earnings start soon and will set the tone, but there is no question that the character of the market has made a turn for the worse. The market is no longer as forgiving of Donald Trump as it once was and the FAANG and big cap technology names are no longer the safe haven they once appeared to be. Leadership is lacking in both cases and that is the challenge of the market into the second quarter of 2018.

We can go on at great length about what has caused this shift in price action but what we really need to focus on is how to navigate it. Many investors have been conditioned to expect steady gains with almost no downside. Things have changed and we need to stay patient, protect capital, and be ready to take advantage of opportunities. That is the roadmap for 2018.

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