Written by Lance Roberts, Clarity Financial
While we are short-term cautious, the intermediate-term technical outlook remains positive. This is particularly the case as we look to the more seasonally-strong last quarter of the year.
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With the weekly “buy signal” intact, any short-term correction that doesn’t violate important support should be used to selectively add exposure as needed. As noted below, the only concern is the rally from the lows earlier this year have already pushed back into more extreme overbought territory. While this does suggest upside is potentially limited, overbought conditions can remain overbought for quite some time given enough momentum. If the indicator breaks below (-20) it would suggest a bigger corrective process is underway.
Again, for now, the bullish trend remains and we need to honor that as such.
That doesn’t mean it won’t change. It will, which means you must not neglect your portfolio management process. It is worth remembering that portfolios, like a garden, must be carefully tended to otherwise the bounty will be reclaimed by nature itself.
- If fruits are not harvested (profit taking) they ‘rot on the vine.’
- If weeds are not pulled (sell losers), they will choke out the garden.
- If the soil is not fertilized (savings), then the garden will fail to produce as successfully as it could.
So, as a reminder, and considering where the markets are currently, here are the rules for managing your garden:
1) HARVEST: Reduce “winners” back to original portfolio weights. This does NOT mean sell the whole position. You pluck the tomatoes off the vine, not yank the whole plant from the ground.
2) WEED: Sell losers and laggards and remove them from the garden. If you do not sell losers and laggards, they reduce the performance of the portfolio over time by absorbing “nutrients” that could be used for more productive plants. The first rule of thumb in investing “sell losers short.”
3) FERTILIZE AND WATER: Add savings on a regular basis. A garden cannot grow if the soil is depleted of nutrients or lost to erosion. Likewise, a portfolio cannot grow if capital is not contributed regularly to replace capital lost due to erosion and loss. If you think you will NEVER LOSE money investing in the markets…then STOP investing immediately.
4) WATCH THE WEATHER: Pay attention to markets. A garden can quickly be destroyed by a winter freeze or drought. Not paying attention to the major market trends can have devastating effects on your portfolio if you fail to see the turn for the worse. As with a garden, it has never been harmful to put protections in place for expected bad weather that didn’t occur. Likewise, a portfolio protected against “risk” in the short-term, never harmed investors in the long-term.
With the overall market trend still bullish, there is little reason to become overly defensive in the very short-term. However, there are plenty of warning signs that the “good times” are nearing their end, which will likely surprise most everyone.
See you next week.
