“SPY Daily Chart: This week’s advance was basically a short-covering rally. Things were really black on Monday, probably sucking in the last of the shorts. While Wednesday’s huge rally caught our attention, volume on that day wasn’t as exciting. Yes, it was above the 250-EMA of volume, it should have been a lot higher if the move truly was a turning point. The daily PMO has turned up, but just barely.”
“SPY Weekly Chart: The net gain for the week was just under +3%, and the weekly PMO was barely affected.”
“SPY Monthly Chart: The line drawn across the February low represents the most immediate overhead resistance. The next important support is on the secular bull market rising trend line; however, I favor the top and bottom of the 2015 consolidation pattern as a more credible zone of support. The monthly PMO is below the signal line and falling. This is very bearish.”
As I noted above, the markets are indeed very oversold on a short-term basis, and as Carl noted in his missive, we must be wary of oversold readings in a bear market as markets tend to remain oversold during protracted declines. However, deeply oversold readings have a high probability of sparking a rally and currently, the S&P is currently displaying some of the lowest readings seen in almost three years.
I agree with Carl’s conclusion that we are most likely in a bear market.
But that does not mean that you should sell everything you own.
There is a simple reality about markets which is continually misunderstood by those of the “persistently bullish” persuasion.
During bull markets, given the prices are “trending” higher over time, investors should have a general tendency to “buy value” on opportunity and hold those investments over the longer-term.
However, in bear markets, where prices are “trending” lower over time, investors need to adopt an attitude of selling into rallies, holding cash, and searching for truly undervalued opportunities. Also, shorting becomes a much more viable strategy.
During running bull markets, it is best to run a primarily long-biased portfolio. However, as we move into 2019, we will look to start adding a “short book” to our “long-biased” portfolio strategies.
While we have been holding significantly higher levels of cash since earlier this year, and have been consistently buying bonds on moves above 3% on the 10-year Treasury, we are now looking for the next set of opportunities.
Last Thursday, we did add 1/2 positions of a few equities we like (MSFT, V, PFE, ABBV) but have hedged that with a position in Gold Miners using GDX as a proxy. On a rally, back to our target zone, we will sell positions that have not been performing as well as expected, and look to add additional hedges to portfolios as needed to protect long-term holdings.
While we have a long-term view of the market, and our holdings of high-quality enterprises, there are a couple of things investors must remember.
- Companies change. What was a great company 5-years ago, may not be so today. (GE)
- Markets change. Bull markets are only one-half of the market cycle.
- Life changes. In 2000, you had 30-years to retirement. Today, you have eleven, which means riding out a bear market is not as feasible as it once was.
- Needs change. In 2000, the goal of your portfolio was accumulation. Today, kids are heading to college, the house note has to be met, and retirement needs are clearly in focus.
The point is that things are vastly different today than they were 5, 10, or 15 years ago and both WHAT you need from your portfolio, and HOW you achieve those needs, have also changed. Your portfolio strategy must change also over time.
Yes, it is absolutely feasible to buy good quality companies, hold them, and ride the markets out over time.
You will make money.
You just won’t meet your financial goals due to the destruction of both capital and time during the second half of every market cycle. (Read this)
The market cycle does appear to have changed. Therefore, portfolio strategies also need to adjust for a different environment until this part of the cycle completes.
However, that is a conversation for next year.
In the mean time, we wish you a happy, safe, and prosperous New Year.
