posted on 31 July 2016
Continue To Prepare
While we await a better entry point, assuming the recent bullish action is maintained, it is important to continue to prepare portfolios for further action.
I have often equated portfolio management to tending a garden in the past. Like a garden we must:
So, with this analogy in mind, here are the actions to continue taking to prepare portfolios for the next set of actions:
Step 1) Clean Up Your Portfolio
Step 2) Compare Your Portfolio Allocation To The Model Allocation.
Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are looking for a pullback to reduce the extreme overbought condition of the market without violating any major levels of support.
IMPORTANT NOTE: Taking these actions has TWO specific benefits depending on what happens in the market next.
No one knows for sure where markets are headed in the next week, much less the next month, quarter, year, or five years. What we do know is that not managing risk in portfolios to hedge against something going wrong is far more detrimental to the achievement of long-term investment goals due to the inability to recover the "time" lost getting back to even.
This fallacy was clearly pointed out this past week in probably what ranks as the worst bit of financial analysis put out this year by Myles Udland via BI
Okay. Let's make a couple of real-world assumptions. Most people, by the time they enough to effectively invest and actually start doing so, is about 45 years of age. This gives them about 20-years to their retirement goal.
Here's the problem, since most people "assume" the markets return 8% a year, a myth previously debunked here, a 26% return over 16-years is just 1.625% annually. Buying a bond fund would have yielded in excess of a 150% rate of return or 9.375% annually with substantially less volatility.
"Getting Back To Even" never has been, and never will be, a successful investment strategy.
S.A.R.M. Sector Analysis & Weighting
The current risk weighting remains at 50% this week but will increase to 75% given appropriate market conditions.
Again, we must be given the right "set up" to increase equity allocations. Begin by "averaging up" in existing holdings to match model allocation and weights. When, and IF, the market confirms the continuation of the "bullish trend," then begin adding new holdings to the model.
Relative performance of each sector of the model as compared to the S&P 500 is shown below. The table compares each position in the model relative to the benchmark over a 1, 4, 12, 24 and 52-week basis.
Historically speaking, sectors that are leading the markets higher continue to do so in the short-term and vice-versa. The relative improvement or weakness of each sector relative to index over time can show where money is flowing into and out of. Normally, these performance changes signal a change that last several weeks.
The last column is a sector specific "buy/sell" signal which is simply when the short-term weekly moving average has crossed above or below the long-term weekly average. The number of sectors on "buy signals" has improved from just 2 several weeks ago to 19 this past week.
The risk-adjusted equally weighted model has been increased to 75%. However, as stated above, a pullback in the markets is needed before making any changes.
Such an increase will change model allocations to:
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