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posted on 28 February 2016

Monday Morning Call 29 February 2016

by Lance Roberts, Clarity Financial

All week investors have been hoping that the G-20 meeting would yield more Central Bank commitments for further monetary interventions to keep the "circus in town."

Unfortunately, Monday morning may see the markets under pressure as such hopes were left "wanting."

Here is the key passage from Bloomberg:

"The G-20 members agreed to use monetary, fiscal and structural tools to boost growth, according to a final communique released in Shanghai on Saturday. Underscoring concerns over the limitations of central bank-led stimulus, 'monetary policy alone cannot lead to balanced growth,' the document said.

Leading into the meetings, Bank of England Governor Mark Carney warned counterparts against getting embroiled in a currency war by pushing interest rates too low, while International Monetary Fund Managing Director Christine Lagarde said the effects of monetary policies, even innovative ones, are diminishing.

With the U.K. mulling spending cuts, Japan planning a sales tax increase, Germany's finance minister warning debt-funded growth just leads to 'zombifying' economies, and the U.S. constrained by a lame duck president and Republican-controlled Congress, it may fall to China to ratchet up the fiscal firepower.

'Investor hopes of coordinated policy actions proved to be pure fantasy,' said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. 'It's every country for themselves.'"

This is not likely to set well with investors as markets continue to deteriorate internally as shown in the market internal study below. (This is a monthly study, so only end-of-the-month closes are counted.)


While the market is desperately clinging onto long-term moving average support currently, it is only barely doing so. What is clearly apparent is that despite "bullish hopes" that the recent correction has now ended, with all internal measures pointed lower this will likely prove not to be the case.

Dana Lyons noted on Saturday that the Russell 2000, which has been under considerably more downward pressure in recent months, is approaching multiple layers of overhead resistance. A failure at those resistance levels will continue to confirm the bearish trend in the Russell 2000 which is already in a full-fledged bear market.



As stated two weeks ago in this weekly missive:

"I recommended using any rally this week to move to the lowest level of equity exposure for this part of the cycle. (When the bear market is confirmed we will take portfolios to market neutral by hedging off any remaining equity risk, but we are not there as of yet.)

I suggest doing this by:

  • Trimming back winning positions to original portfolio weights: Investment Rule: Let Winners Run

  • Selling positions that simply are not working (if the position was not working in a rising market, it likely won't in a declining market.) Investment Rule: Cut Losers Short

  • Holding the cash raised from these activities until the next buying opportunity occurs. Investment Rule: Buy Low

As such there is now little for us to do except to wait, and watch patiently, for the market to either confirm a "bear market," OR stabilize and begin to rebuild the bullish supports necessary to allow equity risk to once again be increased.

Neither situation will make itself apparent in short order, so relax and we let the market dictate what actions we take next. "Guessing" at the markets has not typically been a successful and repeatable strategy."

So, for now, we continue to wait. When indicators begin to improve, and turn back into the positive, which could be next week, month, or year, such will be the indication "more constructive market dynamics" are in place increasing the reward/risk ratio. That is not now.

As investors, we should not be basing our investment decisions on "hope," but rather an analysis of the evidence that would put the highest probability of "winning" in our favor. While you can certainly continue betting on "weak hands," any good poker player will tell you that is a sure way to eventually go broke.

S.A.R.M. Model Allocation

If you are a new reader to this missive, click here and review previous explanations of the S.A.R.M. Model in the MONDAY MORNING CALL section of that missive.

There have been no changes to S.A.R.M. model in the past week.


Last week's rally increased CASH to 50% of the portfolio from 45%, with 35% in bonds, and 15% in equities.

It is completely OKAY if your current allocation to cash is different based on your personal risk tolerance. This is just a guide.

As you can see, there are not DRASTIC movements being made. Just incremental changes to reducing overall portfolio volatility risks. However, if the expected bounce fails at resistance, then further reductions will be required in accordance with the risk reduction modeling.

Remember, as investors, our job is not to try and capture every single relative point gain of the market as it rises. While we certainly want to participate in the rise, our JOB is to protect our capital against substantial losses in the future. A methodology that regularly harvests gains, reduces risk and keeps the portfolio focused on longer-term goals will lead to a more successful outcome.



As you will notice, I never advocate being 100% out of the market. However, I will recommend a market neutral strategy once a confirmed bear market trend is established. As I have discussed many times in the past, it is far too difficult to reverse course when the market changes from a negative back to a positive trend. Emotions keep us from taking the correct action. There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks.



With the market having broken the long-term bullish-trend, the risk currently remains to the downside. As discussed throughout the entirety of this week's missive, the technical damage to the market is significant and last week's rally will most likely fail and soon.

With portfolio allocations now reduced to TARGET levels, the only action to currently take is NOTHING. We are now in the position to just WAIT and allow the market to TELL us what it wants to do next.

While many will speculate on a resumption of a "bull market" in the short-term, the RISK of being WRONG far outweighs the possibility that such prognostications are correct.

However, in the event the market does reverse course, and re-establish a bull trend, we will simply increase equity allocations back up accordingly.

Yes, it really is just that simple.

Portfolio management is not difficult, it is just a function of letting the markets tell you what it wants to do, rather than "hoping and guessing" at what YOU want it to do.

You are not in control. When you learn to accept that, managing your money because vastly easier.

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

Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principal. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)


401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don't see your exact fund listed, look for a fund that is similar in nature.


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