Written by Lance Roberts, Clarity Financial
As I noted in Has The Bull Market Ended?, the market is 2-standard deviations oversold and testing the 200-dma on a very short-term basis. This is not surprising, as by the time “sell signals” are triggered on a weekly basis, the market is generally “oversold” enough to elicit a “reflexive” bounce.
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With confirmed “sell signals” in place, it is time for investors to rethink levels of risk exposure in their portfolios currently.
Over last few weeks, we have repeatedly suggested investors reduce and rebalance portfolio exposures. With the “sell signals” confirmed we will now lower the model weightings for equities by 25% and increase cash levels until the signals reverse.
If you have taken “no actions,” up to this point, the following guide can be used when a “reflexive bounce” occurs. Importantly, let me restate, the market is oversold enough for a bounce so don’t “panic sell,” but rather use the “bounce” to “sell into strength.”
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 (Technology)
- Sell laggards and losers
- Raise cash and rebalance portfolios to target weightings.
Step 2) Compare Your Portfolio Allocation To Your Model Allocation.
- Determine areas where exposure needs to be increased or decreased (bonds, cash, equities)
- Determine how many shares need to be bought or sold to rebalance allocation requirements.
- Determine cash requirements for hedging purposes
- Re-examine portfolio to rebalance allocations to adjust for relevant market risk.
- Determine exit price levels for each position needing to be sold on a forthcoming rally.
- Determine “stop loss” levels for each position being maintained.
- 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 failed rally to the 100-dma to sell equity holdings into and raise further cash levels. We will also add further market hedges on a rally that fails at resistance.
Stay alert…I have a sneaky suspicion we are not out of the woods just yet.
Have a great week.
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