Participant Solutions

It is a very confusing and difficult market to navigate currently. Last year, defense won the game, with Dow outperforming the Nasdaq by the widest margin in over two decades. This year, the Nasdaq is up more than 8%, and the “Generals” have re-emerged as market leaders.

Yet, this all occurs against a fairly dismal backdrop of data, as discussed in our recent post on “Contrarianism:”

1. 1. The Fed is remaining aggressive on monetary policy.

1. 1. Central banks are reducing liquidity to markets.

1. 1. Inflation remains problematic.

1. 1. Earnings remain elevated.

1. 1. The economy is slowing.

1. 1. Consumers are running out of savings.

We certainly agree with the more dismal outlook and continue to suggest that investors should be more cautious in their portfolio allocations. However, this is also the point where investors make the most mistakes. Emotions make us want to avoid all risks of loss. That is why investors almost always “sell” at the bottom of markets when they should buy.

Such is the point where we are today. There are lots of reasons to be bearish. However, the technical improvements in the market suggest investors should be buying. It’s hard. It also doesn’t mean it will immediately work, as the markets could correct first before the final bottom.

But this is the risk of investing. To make money investing in the financial markets, you have to put capital at risk of losing it. No “risk-free” investment will provide substantial rates of return over the long term. The question that investors must answer for themselves is how much of the “risk” has been removed from the financial equation.

Unfortunately, no one knows the answer. All we can do is make our best guess.

And that is the hard part.

Such is why over the last three weeks, we have repeatedly discussed the technical improvement of the market and the message it was sending. That technical improvement continues to push us to cautiously increase exposure. We continue suggesting adding exposure on the equity side of the portfolio and further reduce cash levels. However, continue maintaining an overweight position in cash and short-term Treasuries. 

As we add exposure, we continue to tighten up stop-loss levels, hedging our portfolios as needed, and looking to rebalance the portfolio back to target weightings.

Until the market confirms the “bear market” is over, we continue to trade cautiously. We DO NOT have to be early for the next bull market. When it comes, there will be plenty of time to participate in it and grow capital successfully.

As noted, with the longer-term MACD signal on a “buy,” which now confirms the short-term buy signal, there is hope the market could be trying to find a bottom. For now, continue to give the market some time to stabilize and provide a clearer direction before taking on additional portfolio risk. Patience will be key in not making a mistake. 

Continue managing risk for now. We will give you instructions on when to increase exposure as it occurs.

1. Tighten up stop-loss levels to current support levels for each position. 
2. Hedge portfolios against significant market declines. 
3. Take profits in positions that have been big winners 
4. Sell laggards and losers. 
5. Raise cash and rebalance portfolios to target weightings. 

Notice, nothing in there says, “sell everything and go to cash.”

If you are close to retirement or are concerned about a pickup in volatility, there is nothing wrong with being very underweight equities. It is better to be safe than to give up dreams of retirement to rebuild lost wealth.