Yesterday we posted our STA Risk Indicator which confirmed the ‘SELL” signal that was given back in April. We stated; “The recent correction in the market during the month of May, and then the brutal sell off in the market on Wednesday, has not been enough to lower our risk indicator to a level that would warrant increasing equity “risk” exposure to portfolios. Currently, the outlook is still very bullish and is correcting, and, as a contrarian investment manager, this is a time to CONTINUE raising cash and hedging risk in portfolio on market rallies.”
This advice is still correct with the exception that we don’t want to panic sell at a very short term potential bottom. As you will see in the attached chart on a weekly basis the market remains on a “sell” signal and suggests that the current correction has more to go, to around 1200, assuming that the market acts normally from being in such an overbought condition as it is currently is. However, as markets do not travel just straight up or down at any given time, on a daily basis the market has gotten oversold enough that a bounce to the 1325 area on the S&P 500 is very likely.
We tell you this so that you can understand the interrelated relationships between daily and weekly movements. On a weekly basis the markets are overbought and are most likely in the process of a more protracted correction as we have been stating now since April 25th. The correction has NOT been large enough at this point to warrant increasing exposure to equity positions (risk assets) in portfolios. However, on a DAILY basis the market is oversold enough for a bounce to allow for more portfolio rebalancing (selling risk assets) and raising cash levels until the broader correction is completed.
Risk management is not a light switch action of being “all in” or “all out” – we are not playing a hand of Texas Hold’em. However, we do administer a rheostat approach to money management of dialing up and down exposure to risk assets as the market action dictates. At the current time all of our indicators that we track are showing that there is more risk to being invested in the markets for the next couple of months than potential reward would dictate. However, as we don’t want to panic sell at temporary bottoms, our shorter term analysis indicates that we should get a rally in the next few days to allow us to more safely rebalance portfolios into.