As promised, we'll continue to send out timely information with this Red Sky Report on an as needed basis.Since the middle of February, when the market embarked on this predictable recovery rally, the only real news has been about politics and who needs to hear more of that?But now we have something to talk about.There may be decisions to be made in the near future.Here's what we're watching and what investors should consider now.
Market Approaching Another Inflection Point
Prices have jumped higher since the exhaustive lows on February 11th.The market as a whole has participated but our measures of demand in terms of volume and breadth have been less than impressive.Select sectors like those most beaten down in 2015 in industrials, materials, energy, metals and now banks are ripping higher putting in some incredible short-term gains.Many point to short covering in these sectors as the driver of recent gains, but every major turn begins with short covering so who knows.Lots of sectors and a growing number of indices are dancing across the zero line on a YTD basis after being down nearly 10-12% a few short weeks ago.Wow!
But let's not get too excited yet.Bear markets are full of deception and this set up has the potential to be a trap for late buyers.After the S&P 500 has risen over 9% off the lows (still down 2% YTD), sentiment figures are starting to work back into the bullish camp again, which automatically makes me nervous.I hate to be the contrarian but sentiment is consistently one of the few things that we can rely on when it comes to predictability.Thankfully, these numbers are not yet at an extreme, see the chart below.There is room above for further price gains and even more bullishness as you can see.
From a technical perspective, prices in many areas have moved back UP to the break DOWN point.Effectively, this is the place when the markets failed at the first of the year.Those who were caught by the sell off now have an opportunity to bail without incurring too much damage YTD.Some will do so, others will hold on.It remains to be seen which group is the stronger force.But weekly charts are still down and negative for most of the US stock market as is the long term average on the S&P 500, which puts us in a precarious place.The obvious level of strong overhead resistance on the S&P 500 is now 2023-2040, not far from here.Here’s a closer look with noted long term averages.
Finally, we would have liked to see more basing action around the February lows before this current rally occurred.The longer the base, the more lasting the rally.We didn't see much of a base which makes this entire rally look like a technical bounce in an ongoing bear market downtrend.That's just the way it looks based on the technical evidence, which can change for the better for any number of reasons.We just need to be ready to hit the brakes hard again if sellers materialize in force in the next few sessions.We're ready.So this is an important moment in time to pay very close attention to market action and the delicate balance between buyers and sellers.
What To Do
This is an excellent time to review your desired exposure to the markets.If, for whatever reason, you find that your investment portfolio is too heavy in stocks or stock funds, this may be one of those important and timely opportunities to reallocate to other options with better downside properties.We have been having quite a few conversations with clients in the last couple weeks along these lines getting ready to rebalance from stocks to one of our Income models in certain situations.Again, this type of change should only happen in recognition of a need to rebalance your established prescribed portfolio allocation among our various strategies, not because you think you know the future or find yourself afraid.I'll give you an example.We have identified several households that have been pulling monthly withdrawals from their income accounts for the last several years.In the process, the income side of their portfolio has significantly declined as a percentage of the total.Meanwhile the equity side of their portfolio has become disproportionately larger.From a timing perspective, this is a great time to reallocate from stocks and put the proceeds back into the Income strategy.
Our Income strategies are not your Grandma's "Income"
Our "Income" strategies are not your typical income strategies, which most people associate with different types of Treasury bonds.Our Income strategies come in two flavors.The first is called Freeway High Income and it is designed for taxable accounts where we seek tax efficient total returns investing in a large percentage of high yield and intermediate term tax-free municipal bond funds.The other portion of the portfolio tactically owns high yield corporate bonds now paying 6-7% annual interest.Money in the Freeway strategy often flows between these two groups, as they tend to respond differently according to primary market forces.Honestly, we love having the option to be defensive (with muni bonds) or offensive (with corporate bonds) depending on market trends.Occasionally, we might also take positions in inflation protected bonds, preferred securities, emerging market debt or floating rate funds as well.All options here are purposely not Treasury bond options and most pay far higher interest rates with stock market type returns when the trend is our friend.
Our second type of Income strategy is designed for our tax deferred retirement accounts like those with IRA, Roth, or SEP registrations.This strategy is called..... Retirement Income.I know, so creative.Retirement income has a much larger allocation to high yield corporate bonds but can own any income bearing securities on the Freeway list above, except municipal bonds.So again, Retirement Income is anything but your traditional "income" strategy.
In both Income strategies we have a tactical trading system that buys and owns these funds when the price trends are favorable.This has not been the case since June of 2015 and both strategies have remained largely in cash since then to our great pleasure.But now things have changed.In the last two weeks our tactical system has given us several confirming short term buy signals and we have taken entry level positions in both strategies, specifically in emerging market bonds and high yield corporate bonds.
Both income models are positive YTD and gaining ground daily.I will shamelessly offer that our Income strategies are both in excellent positions for investors looking to add new money to the markets, or find a new home for recently sold positions.Timing is everything as usual.
That’s it for now.Stay focused and avoid complacency at this important moment.We’re not out of the woods yet.
Have a great weekend!