BUY SIGNAL
After meandering sideways for most of the week, stocks finally shot up on Friday to close above the high of the previous week. In addition, Breadth Indicators (see chart below) are now all positive. The Summation Index turned up from very oversold levels, and historically when this happens it usually means we are in the sweet spot (early stages) of the rally.
This looks like the start of a trade-able rally. That does not mean that I think stocks will advance all the way up to the highs of last year. Just that odds favor an advance that we can take advantage of if we are nimble. Historically bear market rallies are pretty anemic, so we have to be on the lookout for changes in the trend and be ready to exit positions when things change.
SO WHAT IS THERE TO BE WORRIED ABOUT?
I am still working under the assumption that we are in the early stages of a bear market. I wrote in previous newsletters why I feel this way. Another confirmation of that view is that defensive sectors like Consumer Staples, Utilities, and Treasury Bonds are outperforming Small Cap, Financials, and Technology.
In addition, this market bottom was made without the capitulation (fear) that would have shown up in the VIX chart. If we are in a bear market, there will be another wave down that will probably be accompanied by the type of fear that could signal a better buying opportunity.
I believe we can buy into this rally, but it needs to be done with risk management as a priority!
CLIENT UPDATE
I added a small equity position Friday, and will be looking to add more. My preference is to add those defensive sectors that are outperforming. Those sectors are somewhat overextended so I will be looking for better entry points.
Aggressive accounts are 20% invested in a Treasury Bond ETF, 10% invested in a Stock ETF and 70% invested in a Money Market Fund.
Conservative accounts are 10% invested in a Treasury Bond ETF, 5% invested in a Stock ETF, 30% invested in High Yield Municipal Bond Funds and 55% in a Money Market Fund.
Craig Thompson, ChFC
Email: [email protected]
Phone: 619-709-0066