Sunday, February 2, 2014

Intellectualizing can be hard to do...

Last week I shared a few fundamental givens that might suggest that the stock market's present pullback is nothing to lose any sleep over (of course if your portfolio's makeup is right for you, you don't lose sleep regardless of the extent of a pullback [note: if you're our client and you're losing even a wink, and our next review meeting is not on the calendar, call or email me]). I also intimated that the longer-term technicals might support that notion as well. And while I don't kneel to the technicals, I do pay attention to them due to the simple fact that so many others do (call it self-fulfilling prophesy risk).

I pay particular attention to the 200-day moving average (calculated by dividing the sum of a security's average closing price over the last 200 days by 200) for the major indices as well as the various sectors our clients' portfolios hold. It is a widely followed---and respected---gauge of the long-term market trend. I'll here throw in the short and intermediate-term indicators as well---just to clue you in on what the technicians may be trading on in the coming weeks.

The moving averages charts for the S&P 1500 Index (combines the S&P 500, the S&P Mid Cap 400 and S&P Small Cap 600 indices) are sending bearish short-term, neutral to bearish intermediate-term and bullish long-term signals to the technicians. So as not to numb you with all the details, here are the highlights (source: Bloomberg):

Short-term trend signal: Only 30% of the stocks in the S&P 1500 are trading above their 20-day moving average, with only 31% (in relation to the 20 day MA) rising---that's bearish.

Intermediate-term trend signal: 42% are trading above their 50-day moving average, while 50% are (in relation to the 50 day MA) rising---that's neutral to bearish.

Long-term trend signal: 72% are trading above their 200-day moving average, while 75% are (in relation to the 200 day MA) rising---that's bullish.

In terms of sectors: It's very much the same picture with four in particular---tech, industrials, materials and healthcare---showing very bullish long-term trends.

Now, like I said, I don't bow to the technicals. I don't subscribe to (although I don't entirely discount) the notion that identifying trends in the pricing of stocks---as well as a zillion other visuals---can form the foundation of a sound long-term investment strategy. My purpose for bringing this sort of stuff to your (I'm really speaking to our clients) attention is to stand between you and the barrage of media hyperbole that these days comes from all directions. I know, from 30 years (this August) of experience, that while clients may profess their understanding of the volatile nature of markets, intellectualizing can be hard to do during sell-offs.

So what happens if the longer-term technicals turn bearish? They'll either inspire a deeper sell-off (which they're supposed to), or they'll occur right when stocks have become so cheap that the fundamentals simply won't allow for more selling (meaning sellers won't settle for yet lower prices). If you're a long way from retirement (and, therefore, heavily in stocks) you'll, if you take my advice, continue to fund your long-term accounts right through the next bear market (picking up more shares at cheaper prices along the way). If you're retired, or close to it (and, therefore, moderately in stocks), you'll, if you take my advice, rebalance your portfolio to a predetermined target a couple times a year (buying when prices are falling and selling when they're rising) and, if you're our client, rotate among sectors at the margin.

Again, if you're our client and you're losing even a wink, and our next review meeting is not on the calendar, let's get together...

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