So far this year, we saw a strong market start with significant correction over about a week. Since then, we have seen a partial rebound, but what’s next? We don’t have a crystal ball and any guess is speculation. We appear to be treading sideway as this market reevaluates the possibility of higher interest rates, increased risk to bonds, and how those factors might affect stocks. This sideways range could exist for up to several months as the likelihood of future recession is priced into the assumptions.
From a trend model perspective, we are very close to several price markers which support a negative view of the markets. If the market crosses these price targets, computer selling will likely kick in. Another concern is how little support there is to selling. Markets are generally trading without a normal amount of buy orders supporting current prices, so once you push through a price, additional orders tend to be few and significantly lower offers. This makes the markets more volatile, with larger swings in prices. We saw this particularly in the initial downdraft, which happened far faster than normally would be expected. It’s fair to say that present risk in stocks is elevated.
On the other hand, there is not a lot of other better places for money to go. Many bond funds and Real Estate funds could lose money or at least face a significant head winds as interest rates increase. Many people believe that eventually, stock markets will settle down resume their march, fueled by money from bonds, corporate and individual tax savings, repatriation of dollars from overseas, and corporate buybacks. This view would expect much higher market volatility, but with a general direction up.
This duality of views, positive and negative, can be seen in our portfolio models, some of which are all in and others have been backing out. It is likely that we are seeing a changing what and who is winning in markets. What worked before is likely to not work going forward. We experienced such a smooth ride last year and we should expect to move to normal to elevated market volatility for some time. Trend or momentum-based investment models like ours should fare well, once the market finally makes up its mind as to direction.
Our advice is not to draw conclusions too early. Don’t let our emotional guesses of what could happen drive investment allocations. Our models will respond to the direction that is finally resolved. Stay the course, trust that we built your allocation specifically for you, and know that we will follow the planned changes as the trends emerge.
These are the opinions of Rick Watson and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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