Written by Lance Roberts, Clarity Financial
As we stated last week, the “odds” favor the “bulls” currently because:
- Bull markets last longer than bear markets
- Bull markets are hard to break
- Bull markets can defy logic longer than most anticipate
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But bulls, like bears, are only right half the time.
Unfortunately, when the “bulls” are wrong – they are “really wrong,” and the long-term damage to capital is irreparable.
This is why we maintain a focus on the “trend” of the market for maintaining portfolio allocations. When markets begin to break down, or change trend, and the risk of loss outweighs the potential for reward, we become aggressively defensive.
Currently, such is NOT the case, as the bullish trend remains intact.
The chart below shows the weekly view of the S&P 500 index going back to 2014.
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Since this is a weekly indicator, a strong rally, or decline, mid-week can REVERSE a signal. While the “1st sell signal” is still getting closer, the rally this past week kept it from triggering, for now.
As I detailed last week:
- The first of the two is simply an “ALERT” signal which suggests investors should “pay attention” to their risk related allocations and rebalance those risks accordingly.
- When both lower signals are triggered, a confirming signal, such has generally been a good indication to more proactively reduce allocations, raise SOME cash, and further reduce risk related exposure.
Currently, the market has not violated the accelerated bullish trend nor the bullish trend support levels from the pre-2016 correction advance. With nothing more than just an “alert” signal at this point, there is little to do portfolio wise, except rebalance and reposition risk as discussed below.
Importantly, we are not trying to “guess” at what the market “will do,” we are simply “reacting” to what it “does do. “
The trend is still bullish and we remain long….for now.
That will eventually change, and, as indicated by the green boxes, if it does we will act accordingly reducing risk, raising cash and hedging further as we have done previously during those specific periods.
While we remain on “alert” status currently, the recent correction was nothing more than a much-needed correction within a very extended bullish trend.
Rebalancing Suggestions
It may be time for investors to rethink levels of risk exposure in their portfolios currently.
As I stated at the end of December, we reduced exposure in portfolios by raising cash, adding hedges and rebalancing portfolios back to target weightings.
As noted above, given the sharp sell-off, and subsequently sharp rally over the last couple of weeks, it is prudent to rebalance portfolio risks. Here are some guidelines to think about.
Step 1) Clean Up Your Portfolio
- Tighten up stop-loss levels to current support levels for each position.
- Take profits in positions that have been big winners
- Sell laggards and losers
- Raise cash and rebalance portfolios to target weightings.
Step 2) Compare Your Portfolio Allocation To Your Model Allocation.
- Determine areas requiring new or increased exposure.
- Determine how many shares need to be purchased to fill allocation requirements.
- Determine cash requirements to make purchases.
- Re-examine portfolio to rebalance and raise sufficient cash for requirements.
- Determine entry price levels for each new position.
- Determine “stop loss” levels for each position.
- Determine “sell/profit taking” levels for each position.
(Note: the primary rule of investing that should NEVER be broken is: “Never invest money without knowing where you are going to sell if you are wrong, and if you are right.”)
Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are looking for a retest of the 50-dma to confirm the recent recovery.
Stay alert…I have a sneaky suspicion we are not out of the woods just yet.
