As The Market Bounces . . . Sell

September 7th, 2015
in contributors

X-factor Report 06 September 2015

by Lance Roberts, StreetTalk Live

I have been warning since the beginning of this year that the internals of the market have been deteriorating and even though the market was holding up, the danger was to the downside. Beginning three week's ago, that prognostication has become reality.

Follow up:

Let do a quick review of the last two week's analysis in particular just to catch our new readers up to date.

Two weeks ago I wrote:

"The time has now come to start moving more heavily to cash. As I will discuss throughout this weekend's missive, including the 401k-Plan Manager, it is now time to "OPPORTUNISTICALLY" REDUCE PORTFOLIO ALLOCATIONS.

As noted in the chart below, the markets are now once again extremely oversold. As I have often stated in the past:

'By the time a market signal is given in the market, the markets are very likely at a point of extreme oversold or bought conditions. Therefore, it is always better to use the subsequent relaxation of those extreme conditions to add or reduce portfolio exposure.'

This is why it is never a good idea to 'panic' when something initially goes wrong."

As shown in the next chart, and confirmed by the above, is that a bounce from these oversold levels will run into a substantial amount of overhead resistance where the rally will very likely fail. THIS WILL BE THE POINT TO LIQUIDATE HOLDINGS."

The chart below is updated through Friday's open.


The dashed blue rebound line above (which I have not altered) is at the moment still detailing the bounce in hte markets. This suggests that a retest of October lows is still likely.

Furthermore, the deterioration of momentum continues to suggest there is little buying impetus at this point to support markets from correcting further.

I further stated two week's ago:

"The next chart steps back further to look at the bull market that began in 2009. While you have NOT yet confirmed the end of the long-term bull market, you are exceedingly close. It will take a very strong rally to re-establish the 'bull market' trend at this point, and at such a late stage of the market cycle. The odds are heavily against such an event."


"There is a strong possibility that any advance in the next week or so will be one of the last opportunities to lift excess risk from portfolios before a continuation of the market correction occurs."

As shown in the chart above, there is now a clear "sell signal" in place which continues to support the premise that the previous "bull market" has likely concluded for now.

Note: This doesn't mean that the next great "financial crisis" is upon us. However, corrections that gain enough momentum to trigger "margin calls" is what morphs a simple corrective process into a full-blown bear market.

In last week's missive, I suggested a second reduction portfolio allocations as shown below.

"I have been instructing for the several months, in both this newsletter and the daily blog, to take actions in your portfolio from a risk management perspective. To wit:

'These practices align with the most basic investment rules/philosophies that have been followed by every great investor/trader in history.

  1. Sell positions that simply are not working. If they are not working in a strongly rising market, they will hurt you more when the market falls. Investment Rule: Cut losers short.
  2. Trim winning positions back to original portfolio weightings. This allows you to harvest profits but remain invested in positions that are working. Investment Rule: Let winners run.
  3. Retain cash raised from sales for opportunities to purchase investments later at a better price. Investment Rule: Sell High, Buy Low

There is no magic formula for long-term investment success. It has always been achieved by following simple processes and disciplines that have managed investment risk thereby reducing emotionally driven decisions during times of increased volatility.

If you have been following these instructions, terrific. There is likely only a little clean up left to do currently. Your portfolio should already be underweight equities and the recent correction should have had relatively little impact.

If you are a new subscriber to this report, WELCOME.

Review your portfolio with respect to the instructions above and begin to take actions immediately.

Any reflex rally next week is very likely an opportunity to clear weak, or high-risk, positions out of portfolios and raise some cash should this correction continue.

As stated above, the markets could rally a bit more over the next week or so (S&P 500 2000-2050) but a move substantially higher is likely limited.

IMPORTANTLY: I am NOT saying SELL OUT EVERYTHING. However, I AM saying that you should take actions to reduce risk in portfolios and raise some cash as a hedge against continued volatility for now.

Such actions also give you cash to BUY WITH when the next opportunity presents itself."

What If I'm Wrong

As I addressed earlier this week in "Mark Of A Bear:"

Could I be wrong? Absolutely. With Central Banks globally "at the ready," there is a real possibility that markets could be surprised by what happens next. I think there is a greater than even chance that the Federal Reserve balks at raising rates in September, and mentions remaining accommodative for as long as necessary, sending the markets into recovery mode.

If the market should re-establish its bullish trajectory, it will simply be a function of re-allocating risk back into portfolios at that time.

Yes, you will miss a small portion of the recovery, but such a "miss" will be far less of a consequence than a potential 20-30% correction if the markets fail.

Remember, our job as investors is NOT to try and beat some random benchmark index, but to grow our savings in a manner that conserves our principal over time.

The reality is that the majority of investors are ill-prepared for an impact event to occur. This is particularly the case in late-stage bull market cycles where complacency runs high.

As Dr. John Hussman recently stated:

"If you're taking more equity risk than you can actually tolerate if the market goes south, setting your portfolio right isn't a market call - it's just sound financial planning. It's only fun to be reckless if you also turn out to be lucky. Market conditions are now more hostile than at any time since the 2007 peak. If you want to be speculating, and you can tolerate the outcome, then you're not taking too much equity risk in the first place. But it's one or the other. Can you tolerate a 40-55% market loss over the next 18 months or so? If not, take this opportunity to set things right. That's not the worst-case scenario under present conditions; it's actually the run-of-the-mill historical expectation."

The discussion of why "this time is not like the last time" is largely irrelevant. Whatever gains that investors have garnered during the recent bull market advance will be wiped away in a swift and brutal downdraft. However, this is the sad history of individual investors in the financial markets as they are always "told to buy" but never "when to sell."

Portfolio Management Instructions

Repeating instructions from last week for any reflex rally next week:

  1. Sell "laggards" and "losers" in FULL. These are positions that have performed very poorly relative to the markets. Positions that are out of favor on the run-up, generally tend to fall faster in declines. (Energy, Industrials, Materials, International, Emerging Markets, etc.)
  2. Trim positions that are big winners in your portfolio back to their original portfolio weightings. (ie. Take profits) (Discretionary, Healthcare, Technology, etc.)
  3. Positions that performed with the market should also be reduced back to original portfolio weights.
  4. Move trailing stop losses up to new levels.
  5. Review your portfolio allocation relative to your risk tolerance. If you are aggressively weighted in equities at this point of the market cycle, you may want to try and recall how you felt during 2008. Raise cash levels and increase fixed income accordingly to reduce relative market exposure.

How you personally manage your investments is up to you. I am only suggesting a few guidelines to rebalance portfolio risk accordingly. Therefore, use this information at your own discretion.

Sector Analysis

Technically Speaking

Please review the main X-Factor report this week for my views on the overall state of the market currently.

I am traveling this weekend for the Labor Day weekend, so I am calling in a "technical analysis" expert for his opinion on the overall market.

There are a few individuals that I have the pleasure of knowing, such as Walter Murphy, who have been technically analyzing the markets for longer than most. The thing about price analysis is that it is not just the lines, averages, supports and resistances; there is also a "feel" that is developed after long years of work.

Another such "go to" individual is Authur Hill from I have featured his work in this missive many times in the past as it is often insightful and meaningful for investors.

Here are his latest views:

Oversold Bounces Fall Short

The overall trend remains down for the major index ETFs (QQQ, SPY and IWM). Trading turned volatile with the mid August breakdowns, but the breakdowns remain and these are the dominant feature on most stock-related charts.

Current volatility makes it hard to determine what will happen between the August low and the big support break. SPY and the other major index ETFs became very oversold in mid August and then bounced back with retracements ranging from 38.2% to 50%. As the charts show, the Russell 2000 iShares (IWM) had the shallowest bounce and the Nasdaq 100 ETF (QQQ) was the only one to make it back to broken support.

This means IWM was the weakest on the rebound and QQQ was the strongest. SPY fell somewhere in the middle. As the charts below illustrate, the March-July lows marked a support zone and broken support zone turns into the first significant resistance zone to watch. A break back above this level is needed before I would consider turning bullish again.


Reviewing October 2014, October 2011 and September 2010

The market does not repeat itself verbatim, but we can study the past to better prepare for the present. Yes, I do mean present because we should chart in the present, not the future. As far as I know, future data points are not available so we cannot use them and I certainly cannot predict the future.

As a trend-follower by nature, I am looking at the chart as is and trying to decipher the trend. Once I have determined the trend, I then look for levels, signals and breaks that would prove it otherwise. However, and this is a big HOWEVER, I do not act until a signal or trend-reversing event actually materializes. I will be late to the party and miss the first move, but that is the nature of trend following.

Having clarified that, let's look a three bottoms over the last six years. I chose May-September 2010 (flash-crash), August-October 2011 (European sovereign debt crisis) and October 2014 (Ebola scare) because SPY experienced a very short and sharp decline each time. The ETF took a few months to bottom in 2010 and 2011, but formed a sharp "V" reversal in 2014.

First up is the Ebola-induced break down in October 2014. SPY declined around 10% from the September 19th high to the October 15th low and broke the August low on October 13th. The medium-term PPO (pink) turned negative on October 7th and the long-term PPO (black) turned negative on October 17th.

The evidence was clearly bearish in mid October, but this did not last long as a sharp "V" reversal took shape and SPY recovered its support break within a fortnight (two weeks). More importantly, SPY followed through on this reversal with further gains and the PPO turned positive. Thus, the bulls regained the upper hand on October 27th.


The European sovereign debt crisis is associated with the break down in August 2011. SPY fell over 15% in two weeks from late July to early August. The ETF broke support levels in the 114-116 area and all three PPOs were negative by August 5th.

Clearly, the evidence was bearish at this stage. A period of horrendous volatility then ensued as SPY produced eight 7+ percent moves in two months (four up and four down). I lost a lot of hair during those two months and it never came back. Despite some big swings, notice that SPY never recovered its support break and established resistance near 114 in late August. The trend did not fully reverse until the breakout in mid October. At this time, the medium-term PPO (10,60,1) was also positive and the evidence was tilting back towards the bulls.


Even though a breakout reverses the downtrend, it is sometimes hard to buy the first breakout and initiate a position after a 15% surge (October low to October high). SPY provided a second chance with the November pullback that retraced 62% and formed an island reversal (green oval).

The flash-crash is associated with the break down in May 2010 and a 15+ percent decline in around two months. SPY did not break a major support level until late June when the ETF declined below 94. Note, however, that all three PPOs were negative in late May and this argued for a downtrend. In any case, volatility surged in early May and remained high until August as SPY produced six 7+ percent swings during this period.

The first sign of resilience occurred when SPY forged a bear trap. This pattern occurs with a support break and then a quick move back above support to negate the break down. SPY surged to the June high and then fell back to affirm resistance here. The subsequent decline back to the May low marked a successful support test and there was a small breakout in early September. This small breakout led to a bigger breakout as the index exceeded its June-August highs in mid September. The breakout and trend change were clearly valid because all three PPOs were also on board in mid September.


Key Takeaways from Three Bottoms

  1. Volatility does not dissipate overnight. The declines in May 2010 and August 2011 exceeded 15% and volatility remained for another three to four months. The current decline was around 12% from the July closing high to the August closing low. This suggests that we may be in for another 1-2 months of volatility.
  2. Shallow declines are mere pullbacks. The decline in October 2014 was relatively shallow and, therefore, did not last long. SPY declined just 7.4% from the September closing high to the October closing low.
  3. Follow through is important. The first surge after the October 2014 support break was just an oversold bounce. Follow thru with a gap and further gains signaled that something more bullish at work. Though not shown on the chart, a bullish breadth thrust accompanied the "V" reversal in October 2014.
  4. The first challenge for the bulls is to retake broken support. Broken support turned into resistance in October 2014 and August-September 2011. The ability to take back this level showed resilience. Chartists should be watching these broken support zones for the major index ETFs and the sector.
  5. Confirm a reversal with the PPOs. The medium-term PPO (10,60,1) turns positive when the 10-day EMA moves above the 60-day EMA. The long-term PPO (20,120,1) turns positive when the 20-day EMA moves above the 120-EMA. A resistance break and positive medium-term PPO is the first real sign than the trend is actually reversing.

401-k Plan Manager

Allocation Model


Market Correction Continues

As stated five weeks ago:

"As littered throughout this week's missive...the internals have turned decidedly negative raising waning levels to high alert.

With short term moving averages now turning negative, breadth narrowing and market performance deteriorating, there is every indication that investors should be very alert and turn more cautious currently."

Furthermore, from four weeks ago:

"Topping processes, much like a car that is climbing an extremely steep hill, take time before the previous upward momentum is overtaken by the effects of gravity. It will eventually occur, no one is just exactly sure of when.

Therefore, the best course of action remains taking small integral steps of risk control and portfolio management. These are the same instructions I have continued to recommend over the last several months and will continue to do so UNTIL the market ultimately makes a decision."

IF the markets resume their bullish trend we can always VERY EASILY reinvest harvested cash back into the markets. It is a MUCH HARDER process to make up losses when we have failed to be proactive. Remember - the one commodity we can NEVER regain is TIME.

Any bounce this next week (towards 2000 on the S&P 500) should continue to be used to reign in any overly aggressive risk-based exposure. Holding extra cash as a hedge against market volatility is prudent until the bullish trend re-establishes itself.

Continue to review your current portfolio holdings and make adjustments as needed.

  1. " HARVEST: Reduce "winners" back to original portfolio weights. This does NOT mean sell the whole position. You pluck the tomatoes off the vine, not yank the whole vine out of the ground.
  2. WEED: Sell losers and laggards and remove them garden. If you do not sell losers and laggards, they reduce the performance of the portfolio over time by absorbing "nutrients" that could be used for more productive plants. The first rule of thumb in investing "sell losers short." So, why are you still hanging onto the weeds?
  3. FERTILIZE AND WATER: Add savings on a regular basis.A garden cannot grow if the soil is depleted of nutrients or lost to erosion. Likewise, a portfolio cannot grow if capital is not contributed regularly to replace capital lost due to erosion and loss. If you think you will NOT EVER LOSE money investing in the markets...then STOP investing immediately.
  4. WATCH THE WEATHER: Pay attention to markets. A garden can quickly be destroyed by a winter freeze or a drought. Not paying attention to the major market trends can have devastating effects on your portfolio if you fail to see the turn for the worse. As with a garden, it has never been harmful to put protections in place for expected bad weather that didn't occur. Likewise, a portfolio protected against "risk" in the short-term, never harmed investors in the long-term."

If you need help after reading the alert; don't hesitate to contact me. email


Current 401-k Allocation Model

30% Cash + All Future Contributions

Primary concern is the protection of investment capital. Examples: Stable Value, Money Market, Retirement Reserves

35% Fixed Income (Bonds)

Bond Funds reflect the direction of interest rates. Examples: Short Duration, Total Return and Real Return Funds

30% Equity (Stocks)

The vast majority of stock funds track an index. Therefore, select ONE fund from each catagory.

Keep It Simple.

  • 15% Equity Income, Balanced or Conservative Allocation
  • 15% Large Cap Growth (S&P 500 Index)
  • 0% International Large Cap Value
  • 0% Mid Cap Growth
Common 401K Plan Holdings By Class


  • Stable Value
  • Money Market
  • Retirement Savings Trust
  • Fidelity MIP Fund
  • G-Fund
  • Short Term Bond

Fixed Income

  • Pimco Total Return
  • Pimco Real Return
  • Pimco Investment Grade Bond
  • Vanguard Intermediate Bond
  • Vanguard Total Bond Market
  • Babson Bond Fund
  • Lord Abbett Income
  • Fidelity Corporate Bond
  • Western Asset Mortgage Backed Bond
  • Blackrock Total Return
  • Blackrock Intermediate Bond
  • American Funds Bond Fund Of America
  • Dodge & Cox Income Fund
  • Doubleline Total Return
  • F-Fund


  • American Founds Capital World G&l
  • Vanguard Total International Index
  • Blackrock Global Allocation Fund
  • Fidelity International Growth Fund
  • Dodge & Cox International
  • Invesco International Core Equity
  • Goldman Sachs International Growth Opp.


Large Cap

  • Vanguard Total Stock Market
  • Vanguard S&P 500 Index
  • Vanguard Capital Opportunities
  • Vanguard PrimeCap
  • Vanguard Growth Index
  • Fidelity Magellan
  • Fidelity Large Cap Growth
  • Fidelity Blue Chip
  • Fidelity Capital Appreciation
  • Dodge & Cox Stock
  • Hartford Capital Appreciation
  • American Funds AMCAP
  • American Funds Growth Fund Of America
  • Oakmark Growth Fund
  • C-Fund (Common Assets)
  • ALL TARGET DATE FUNDS 2020 or Later

Balanced Funds

  • Vanguard Balanced Index
  • Vanguard Wellington Fund
  • Vanguard Windsor Fund
  • Vanguard Asset Allocation
  • Fidelity Balanced Fund
  • Fidelity Equity Income
  • Fidelity Growth & Income
  • American Funds Balanced
  • American Funds Income Fund
  • ALL TARGET DATE FUNDS 2020 or Sooner

Small/Mid Cap

  • Vanguard Mid Cap Growth
  • Fidelity Mid Cap Growth
  • Artisan Mid Cap
  • Goldman Sachs Growth Opportunities
  • Harbor Mid Cap Growth
  • Goldman Sachs Small/Mid Cap Opp.
  • Fidelity Low Price Stock Fund
  • Columbia Acorn US
  • Federated Kaufman Small Cap
  • Invesco Small Cap

The above represents a selection of some of the most common funds found in 401k plans. If you do not see your SPECIFIC fund listed simply choose one that closely resembles the examples herein. All funds perform relatively similarly within their respective fund classes.

I will modify this list over time as the asset allocation model changes to reflect international holdings, emerging markets, commodities , etc. as the model changes to reflect the addition of those holdings.

Disclaimer: All content in this newsletter, and on, is solely the view and opinion of Lance Roberts. Mr. Roberts is a member of STA Wealth Management; however, STA Wealth Management does not directly subscribe to, endorse or utilize the analysis provided in this newsletter or on in developing investment objectives or portfolios for its clients. At times, the positions of Mr. Roberts will be contrary to the positions that STA Wealth Management recommends and implements for its clients' accounts. All information provided is strictly for informational and educational purposes and should not be construed to be a solicitation to buy or sell any securities.

It is highly recommended that you read the full website disclaimer and utilize any information provided on this site at your own risk. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level, be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and applicable laws, the content may no longer be reflective of current opinions or positions of Mr. Roberts. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his or her individual situation, he or she is encouraged to consult with the professional advisor of his or her choosing.

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