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posted on 21 March 2016

Monday Morning Call 21 March 2016

Written by , Clarity Financial

While most of the commentary above is for longer-term investors, the very short-term set up of the market is also NOT extremely conducive for increasing equity risk exposure currently.

Andrew Thrasher just penned:

"The S&P 500 has rallied over 10% since the February low, push the index up to its 50-week Moving Average. Meanwhile the Volatility Index ($VIX) has declined approx. 47%, sending the 'fear index' to its lowest level so far this year. Is this signaling a potential return of stock market volatility?

Currently the VIX is the furthest it's been from its 50-day MA since the prior lower high in the S&P 500 back in October 2015. As the chart below shows, it's now more than one standard deviation below the mean based on the distance Volatility historically travels away from its 50-day.

Previous instances of the VIX falling this quickly has led to tough market conditions in the short-term for the stock market.

Fellow See It Market contributor Steve Deppe also shared on Twitter that when the VIX that since 1990 when the index's 20-day return is less than -30%, the average forward return for the S&P 500 over the next 5, 10, 20, and 40 days has been negative."

stock-market-volatility-chart-vix-moving-averages-performance-march-18

Also, corporate share "buybacks," which have been a major support of the recent run in the financial markets, are set to go quite as earnings "blackout period" begins.

blackout-period-flows

As also noted by Bloomberg:

"Corporate buybacks are the sole demand for corporate equities in this market," David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in a Feb. 23 Bloomberg Television interview. "It's been a very challenging market this year in terms of some of the macro rotations, concerns about China and oil, which have encouraged fund managers to reduce their exposure."

Should the current pace of withdrawals from mutual funds and ETFs last through the rest of March, outflows would hit $60 billion. That implies a gap with corporate buybacks of $225 billion, the widest in data going back to 1998."

Stock-buybacks-031916

"Kostin said companies tend to enact a blackout period and restrict share repurchases in the month following the end of a calendar quarter, and come back once they've reported results. In a market where everyone else is selling, the ebb and flow of corporate actions have amplified volatility. The S&P 500 slumped 11 percent in the first six weeks of the year before staging a rebound."

WAITING FOR CHANGE

As discussed throughout this weekend's missive, there is ample evidence suggesting a more cautionary approach remains the correct course of action for now. Therefore, we continue to wait, watch and prepare.

As stated two weeks ago:

"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 as we let the market dictate what actions we take next. "Guessing" at the markets has not typically been a successful and repeatable strategy. As stated above, while very short-term indicators have improved, the longer-term signals have not.


S.A.R.M. Model Allocation

Working With A Model Allocation

NOTE: The following is for example purposes ONLY. It is in no way a suggestion, recommendation, or implication as to any portfolio allocation model currently in use. It is simply an illustration of how to overweight or underweight a model allocation structure.

Again, this is just for educational purposes, and I am not making any specific recommendations. This is simply a guide to assist you in thinking about your own personal positioning, how much risk you are willing to take and what your expectations are. The closer you want to track the S&P 500 Index, the less fixed income, real estate and cash your portfolio should have. For a more conservative allocation reduce allocations to equities and add more to cash and fixed income.

S.A.R.M. Current

The Sector Allocation Rotation Model (SARM) is an example of a basic well-diversified portfolio. The purpose of the model is to look "under the hood" of a portfolio to see what parts of the engine are driving returns versus detracting from it. From this analysis, we can then determine where to overweight sectors which are leading performance, reduce in areas lagging, and eliminate those areas that are dragging.

Currently, while RISK based sectors have improved somewhat, it is still the defensive oriented sectors that continue to outperform. While these sectors have weakened recently, not surprising given the strength of the recent rally, the outperformance on a relative basis suggests that money flows remain cautiously biased.

SARM-Model-031916

Therefore, there have been no changes to S.A.R.M. model in the past week.

SARM-Allocation-Model-021216

The portfolio model remains unchanged this week with CASH to 50%, 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.

If the market can pull back and establish a higher low AND simultaneously move the markets back into an oversold condition, such would likely provide a reasonable opportunity to increase short-term equity exposure.

However, for longer-term investors, we need to see an improvement in the fundamental and economic backdrop to support a resumption of the bullish trend. Currently, there is no evidence of that occurring.


THE REAL 401k PLAN MANAGER

401k-PlanManager-031916

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. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.

RISK-REDUCTION-MODEL

SITTING AT TARGET FOR NOW

While the market rally was quite exceptional over the last few weeks, it has done little to change the currently negative market trends back to positive. As shown in the 401k portfolio manager chart above, all sell signals remain in place currently, and while they improved slightly over the last three weeks, they remain in the negative for now.

However, as I stated two weeks ago:

"...some event (exogenous, monetary or fiscal) could occur which would render such analysis incorrect. If such an event occurs, we will re-evaluate holdings and readjust accordingly."

Those events were the ECB's unleashing of their "QE Bazooka" combined with the Fed's failure to hike interest rates which gave a modest boost to stocks.

As discussed throughout the entirety of this week's missive, the technical damage to the market remains over the intermediate and longer-term time frames. This suggests the reward is still outweighed by risk and continues to suggest a more cautionary allocation.

Therefore, I reiterate last week's note:

"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."

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 becomes 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-Allocation-022016

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.

401k-Selection-List

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