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posted on 02 July 2017

The Only Thing Moving Is Volatility

Written by , Clarity Financial

Last week, I discussed the "Breakout Failure As Resistance Holds" stating: how, despite the carnage in Technology and Discretionary sectors, the overall market was mostly unaffected.

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"The markets shot out of the gate on Monday and rose 20-points for the day which confirmed the breakout above previous resistance. Unfortunately, that bout of 'exuberance' was short-lived and the rally faded for the rest of week closing back below resistance as shown below."

Importantly, note the short-term "sell signal" remains intact in the lower part of the chart which suggests pressure is currently to the downside. With only minor support currently in place, a break below 2410 could well suggest a decline to 2380 over the course of the next month.

As noted on Friday, the last couple of weeks have experienced a sharp rise in price volatility. While stocks have vacillated in a very tight 1.5% trading range since the beginning of June, there has been little forward progress to speak of. However, notice that support at 2416 has remained solid as "robots" continue to execute their program of "buying the dips."

This lack of progress once again has us "stuck" with respect to portfolio positioning. As I noted two week's ago in this missive:

"During last week's pullback, we added modestly to our broader-based 'core' holdings for the second time over the last couple of months. to participate with the breakout. Stops have been moved up and remain very tight.

While I remain very cautious on the overall market, the trend remains bullishly biased which keeps portfolios allocated on the long side for the time being. However, I will not be surprised by a reversal and failure of the breakout leading to us getting stopped out of positions."

Unfortunately, we haven't changed much over the last few weeks with the exception of taking profits and rebalancing technology, health care and international exposure back to market weights last week. (This was noted in the sector recommendations chart in the Sector Analysis section.)

Internals also weakened again after only a mild improvement which also keeps our "guard" elevated.

Despite the uptick in volatility last week, volatility remains suppressed at historically low levels. As shown in the chart below, the recent "back and forth" action has reduced the overbought condition of the market short-term with stocks testing the bullish uptrend. However, complacency remains elevated which suggests the risk of a break of support could lead to a sharper, and rather sudden, decline.

I continue to suggest a healthy regimen of risk management practices in portfolios by following some rather simple guidelines (the same ones that we followed to harvest profits recently as noted above.)

  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against major market declines.
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.

For now, we wait and let the markets tell us what it wants to do next.

Beware the "Dog days of summer."

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