Based on data from June 4 , 2010
Prior to the correction, we observed that investors were too complacent and stock prices were gaining faster than underlying fundamentals (see past comments below). Now, investor pessimism has reached an extreme that suggests that many of those who are willing to sell their stocks may have already done so. Also, while our measures do not suggest that stocks are under-valued, we no longer measure stocks as over-valued. So the recent sell-off may become something more ominous, but we can clearly observe that it has already “corrected” many of the concerns that had held us to a fully defensive posture.
Our trend analysis is neutral at this time. Obviously, trend strength is under pressure. Still, most market indexes remain in up-trends. The easiest way to observe this is by looking at the direction of the 200-day moving averages. When a large percentage of market indexes and mutual funds are priced below their intermediate-term moving averages and the averages continue to slope upwards and to the right, that fact indicates that the market is “oversold”. If the selling continues, the moving averages will roll over indicating a confirmed change in market trend. Absent further deterioration, it is dangerous to bet against an oversold market, especially when accompanied by extreme investor pessimism.
We must be willing to take some risks at times, even when concerns remain, if we hope to participate in market gains. We prefer to make incremental changes and establish clear limits and triggers so we don’t get stuck in or out of the market. Presently, the weight of the evidence warrants moderate equity exposure and a willingness to add exposure to highly ranked funds and ETFs on weakness as long as the major indexes continue to hold support levels and the intermediate term trend remains positive. We have no forecast for near-term market direction. We continue to hold some cash and take advantage of modest hedging techniques to allow us to manage risk while we monitor for renewed trend strength or weakness.
We acknowledge that many investors are more comfortable investing in our fully invested portfolios and managing risk through asset allocation. For “do-it-yourself” investors, we believe that asset allocation is the most practical and certainly the easiest way to effectively manage risk. If any of our readers have questions or concerns about risk management, we hope that they will call us as we are happy to help.
Our tactical portfolios are designed to take a more active approach to risk management. Our goal with these portfolios is to earn more in advances than we lose in declines and therefore to add value over time. Of course, we risk being invested when the market declines and being hedged when the market advances. We are committed to managing these risks, but they are part of any tactical investment strategy. The most important element to long-term investment success is that you understand the risk, reward potential and philosophy of your investment strategy and remain disciplined and focused on your long-term goals.
Summary: The market indexes have suffered their first true correction (peak-to-trough loss of 10% or more) since the March 2009 lows and are struggling to hold support. On balance, our models are more bullish than they have been for some time. Our trend model is neutral. Our tactical portfolios have weathered the recent storm with minimal damage. We are cautiously more bullish and although we are not fully invested, we are allowing for the possibility that the correction will give way to a continuation of the recent bull market.
Summary: The market indexes have suffered their first true correction (peak-to-trough loss of 10% or more) since the March 2009 lows and are struggling to hold support. On balance, our models are more bullish than they have been for some time. Our trend model is neutral. Our tactical portfolios have weathered the recent storm with minimal damage. We are cautiously more bullish and although we are not fully invested, we are allowing for the possibility that the correction will give way to a continuation of the recent bull market.
Prior to the correction, we observed that investors were too complacent and stock prices were gaining faster than underlying fundamentals (see past comments below. Now, investor pessimism has reached an extreme that suggests that many of those who are willing to sell their stocks may have already done so. Also, while our measures do not suggest that stocks are under-valued, we no longer measure stocks as over-valued. So the recent selloff may become something more ominous, but we can clearly observe that it has already “corrected” many of the concerns that had held us to a fully defensive posture.
Our trend analysis is neutral at this time. Obviously, trend strength is under pressure. Still, most market indexes remain in uptrends. The easiest way to observe this is by looking at the direction of the 200-day moving averages. When a large percentage of market indexes and mutual funds are priced below their intermediate-term moving averages and the averages continue to slope upwards and to the right, that fact indicates that the market is “oversold”. If the selling continues, the moving averages will roll over indicating a confirmed change in market trend. Absent further deterioration, it is dangerous to bet against an oversold market, especially when accompanied by extreme investor pessimism.
We must be willing to take some risks at times, even when concerns remain, if we hope to participate in market gains. We prefer to make incremental changes and establish clear limits and triggers so we don’t get stuck in or out of the market. Presently, the weight of the evidence warrants moderate equity exposure and a willingness to add exposure to highly ranked funds and ETFs on weakness as long as the major indexes continue to hold support levels and the intermediate term trend remains positive. We have no forecast for near-term market direction. We continue to hold some cash and take advantage of modest hedging techniques to allow us to manage risk while we monitor for renewed trend strength or weakness.
We acknowledge that many investors are more comfortable investing in our fully invested portfolios and managing risk through asset allocation. For “do-it-yourself” investors, we believe that asset allocation is the most practical and certainly the easiest way to effectively manage risk. If any of our readers have questions or concerns about risk management, we hope that they will call us as we are happy to help.
Our tactical portfolios are designed to take a more active approach to risk management. Our goal with these portfolios is to earn more in advances than we lose in declines and therefore to add value over time. Of course, we risk being invested when the market declines and being hedged when the market advances. We are committed to managing these risks, but they are part of any tactical investment strategy. The most important element to long-term investment success is that you understand the risk, reward potential and philosophy of your investment strategy and remain disciplined and focused on your long-term goals.
(Click on the chart to see it in a larger format.)
