by Lance Roberts, Clarity Financial
After reducing equity risk in portfolios over the last few weeks, we suggested last week the “selling” was likely overdone.
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“All of our “sell signals” have been intact for the last few weeks suggesting more downside risk near term. Those signals have now reversed to the point where we are likely to see a decent reflex rally starting as early as Monday. As noted in the year-to-date performance chart below, the market is 2-standard deviations below its 50-dma and is close to the September low support.”
Just for comparison purposes, here is the chart from last week.
And it is updated through Friday’s close.
It was quite the reversal. The rally pushed the market back above the 50-dma and lower highs’ previous downtrend. Such sets the market up for a retest of all-time highs next week.
Not Out Of The Woods
However, before you get all excited and go throwing your money into the market, you may want to step back and re-evaluate your risk. If you haven’t liked the ups and downs in the market over the last couple of months, you have too much “risk” in your portfolio.
The volatility isn’t over. Particularly as we head into 2021.
Furthermore, while we did expect this rally and added exposure in our portfolios, the previous “oversold” condition has now been largely reversed. As shown below, the market is now back to more “overbought” conditions, which suggests limited upside from current levels. Also, the deviation from the 200-dma is now back to levels that have previously led to mild, short-term corrections.
Still A Sellable Rally
“Such a rally will provide an opportunity to rebalance portfolio risks accordingly. As we will discuss momentarily, the markets will begin to process the election’s impact on various sectors and the market itself.
However, the economy’s disconnect remains longer-term, which can not last as earnings come from economic activity. While the very short-term trading environment is conducive for a rally, the longer-term ‘investing’ environment is still problematic with weakening relative strength, participation, and fundamental issues.
Keep a watch on the Advance-Decline line. Over the last few trading days, the rapid surge in prices pushed that indicator back to more extreme overbought conditions, typically denote short- to intermediate-term tops.
For all of these reasons, aggressively positioned investors can use any rally to adjust portfolio volatility and risk.
Remember, investing isn’t a competition for who can say they “beat the market.” There are no “trophies.” However, there is a heavy penalty to your retirement goals if you are wrong.
Gridlock Is Best For Markets
On Thursday, in our daily “3-Minutes” video, I discussed why the markets were rallying despite a hotly contested election.
As noted, it doesn’t matter who the President is. With the GOP potentially maintaining control of the Senate and narrowing the majority in the House, such vastly reduces significant policy changes such as:
- Higher taxes
- Massive stimulus packages
- Extreme regulation on the oil and gas industry
- Large spending packages on “green energy.”
- Major reform or socialization of health care.
- An inflationary spike.
Such bodes well for the markets as noted by MarketWatch:
“The likely reason that Wall Street likes gridlock is that it reduces the possibility that any major policy changes will take effect. Sam Stovall, chief investment strategist at CFRA, noted in an email to clients that the increasingly likely gridlock ‘lessens the prospects for an increase in regulations and taxes.’ In addition, he added, the gridlock reduces the likelihood of ‘additional fiscal stimulus’ – and that reduced likelihood in turn eases potential inflationary pressures down the road.”
As noted last week, such also aligns with historical Presidential election years. The weakness in September and October turns to strength in November and December.
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