As I stated yesterday, what the markets are doing and how they are acting is more important than what you think they should be doing. I also stated that as they go down, correlations get closer together and the benefits of diversification go away. Simply put, they go down together. So just when you need “diversification” it is not there to save you. Therefore, it is more about when to be in and when to be out, than what to be in. Especially in the mid to short term. This is difficult task, even for professionals.
We have had a over a 10% correction (the definition of a correction), and yesterday showed some signs of resumed optimism. Most of the economic data is still positive, especially the earnings. Technically, we had a 90% Upside Day on both exchanges with 96% Up Volume on the NYSE, and 93% Up Volume on the NASDAQ. Also, the “breadth of the market” was strong with Advancers over Decliners of 11 to 1 on the NYSE, and 7 to 1 on the NASDAQ. The only negative was that volume was below its 30 day moving average. All of the short term indicators are “oversold” and are currently turning positive.
Remember, when it is time to buy, it won’t feel right and you will be scared. But again, the short term indicators have turned positive, and yesterday Jim Cramer said he “doubted this rally” which makes me want to buy even more. Usually, he is a great contra indicator.
I have been holding a lot of cash and bonds along with US stocks. Today, I have deployed 5% of our cash into equities, namely Nasdaq stocks. What do we need for the market to resume its uptrend? An increase in volume coupled with expanding demand would be nice. This is why I am only deploying 5% of clients (and my own) money.
I want to monitor the follow through early next week, and would make changes if necessary. I have attached a graph of all 3 major indices, the DOW (Yellow), the S&P 500 (White), & the Nasdaq (Red) overlaid so you can see how correlated they are. I Also, you can see the early reversal at the current time (right end).
You will never be right all the time or even close, but if you can statistically stack the odds in your favor, you will be right far more than you are wrong. More importantly, this is the best way I know how to manage risk.
Keep studying,
Dan Stewart CFA®
