posted on 14 August 2016
Last week, I stated:
This past week, rates reversed from the downtrend line as suspected as stocks struggled last week to gain ground. I have updated the chart from last week below:
My best guess remains, as stated in the main body of this missive, is that a corrective action happens over the next few days to weeks. As shown in the chart below, the current deviation from the 50-dma combined with an excessively overbought condition, a sell signal, and declining volume has previously led to corrections. Sure, this time could be different, but I am not willing to bet my clients money on that.
Such a correction will pull money out of equities as the quest for "risk" reverses into a search for "safety." That shift will likely push rates back towards recent lows. Therefore, I still think adding to current bond exposure at these levels makes sense...for now.
S.A.R.M. Sector Analysis & Weighting
Not surprisingly, given the lack of direction or resolution of the current overbought condition, the portfolio equity risk weighting remains at 50% again this week. However, as stated above, this allocation will increase to 75% given the appropriate correction of the overbought condition. With all buy signals currently in place, and the bullish trend intact, this is not a market to bet heavily against...for now. However, it is also not a market to become extremely complacent in either.
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.
Notice in the next to last column to the right, the majority of all sectors and indices are pushing extreme levels of deviation from their long-term moving average. Such deviations can not, and do not, last long historically. A resolution of those deviations, which will occur during a corrective action, will provide the necessary risk/reward rebalancing to increase model allocations.
The two charts below graphically show the relationship of each position's performance relative to the S&P 500 Index. If we are trying to "beat the index" over time, we want to overweight sectors/asset classes that are either improving in performance or outperforming the index, and underweight or exclude everything else.
Sectors Currently Outperforming by >1%
Sectors Currently Performing In Line <>1%
Sectors Currently Under Performing By >1%
Index/Other Asset Classes Out Performing S&P 500 By >1%
Index/Other Asset Classes Performing In-Line With S&P 500 <>1%
Index/Other Asset Classes Under Performing S&P 500 By >1%
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:
THE REAL 401k PLAN MANAGER
The Real 401k Plan Manager - A Conservative Strategy For Long-Term Investors
NOTE: I have redesigned the 401k plan manager to accurately reflect the changes in the allocation model over time. I have overlaid the actual model changes on top of the indicators to reflect the timing of the changes relative to the signals.
Risk Remains - So Does The Message
As I noted over the last couple of weeks:
And...again...we are still waiting.
I know. It's boring. We all want to "DO SOMETHING."
But that is simply emotion working on you. In investing, sometimes the best thing "TO DO" is to "DO NOTHING." This is where having the patience to wait for the "fat pitch" becomes much more difficult, but more often than not, provides the best results.
As discussed at length in the above missive, we certainly want to prepare ourselves to increase equity exposure in portfolios, however, we must patiently wait for the right conditions to apply those increases. Furthermore, while waiting for the relaxation of prices to make more prudent entries, it also enables investors to bypass potential "head fakes" of market actions.
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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