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Make or Break Point

Well, the rebound rally from a successful retest of the August 25th lows has been predictably large from a market perspective but as I suggested last update, winners and losers have been far different than anything we’ve seen thus far in 2015.  Regardless, all ships are rising and falling to the same drumbeat of broad market trends.  With correlations among stocks and sectors still very high, we need to stay focused on “the market” and where it’s going next.  In short, we’re not out of the woods yet.  Stocks in aggregate have moved up to a Make or Break Point as of today.  You should have a buy and a sell list ready.


From Lowry’s – October 7th, 2015


“Any further advance that may take place over the near term is still to be considered a countertrend rally in what appears to be a bearish primary trend.”.   Personally, we don’t like to get in front of Lowry’s and call them wrong - because they rarely are.  However, I have seen them change their mind quickly upon compelling evidence.  Here’s what they are looking at in terms of pure technical evidence.  The S&P 500 on the daily charts has rebounded smartly up to the short term downtrend line, marked in blue, which is now 1996 on the index.  This level also marks the mid September high when the Federal Reserve essentially reversed their stance on future rate hikes.  Still mad at Janet for setting that trap. 



Yesterday we saw a predictable pause at this level and there is a chance that prices will break above this important level adding some fire to the buying frenzy.  As I said last week, this situation feels, smells and tastes like 1998 when we had exactly zero pullbacks in a nearly 20% rally for stocks.  I call these lockout rallies – no easy entry points, except to chase prices higher.  We are not counting on that outcome, just open to it.


Even if the market manages to “break out” in the short term we still have some longer-term issues above.  Take a look at the weekly picture of the S&P 500 below.  Here the “primary” downtrend line is higher around 2060 on the S&P – also marked in blue.  So before you get too excited about five up days in a row, keep your eye on the bigger picture which is still unclear at best.



New Opportunities


I have said several times in the last couple months that there are some screamin’ deals in certain sectors (energy, materials, industrials, oversold tech) and countries (China, Japan and eventually Emerging Markets).  Guess what is leading the charge in the last week?  All of those things and we have taken small entry level positions in all lowering our cash position by 15-20% in all Tactical Equity and Blended Asset models.  At the same time, we continue to see things like Biotech, healthcare and select internet names actually lose ground.  Our leaders of the last four years may be giving up.  Rotations of this magnitude can catch a lot of people off guard owning exactly the wrong thing.  Thankfully, we have the luxury of cash, so we can simply buy the new leadership!


This would be an excellent time to show you how our models adjust Net Exposure relative to market trends so you get an idea of when our system starts to cut exposure (moving to cash) and when it adds exposure (buying stocks).  Take a look at our Worldwide Sectors strategy Cash position chart below.  Compare it to the weekly or daily charts of the S&P 500 above.




You will see that we began raising cash in June shown above as a percentage of total assets.  We added to cash in July and August and just recently reduced cash (bought more equities), as a short-term bottom became evident.  When stocks get toppy and experience broad based downtrends as we have seen since May, Net Exposure becomes the only thing that matters.  When stocks are in a primary uptrend, we tend to hold high exposure (low cash) but lean more on Selection criteria to generate returns and control our risk exposure.


So the stuff we’ve bought has mostly been in beaten down sectors where we see real value either in historically low prices and/ or higher dividends.  High Yield corporate bonds are also working hard to entice investors with near 7% yields and SOME price strength but it’s not enough price strength yet for us to take a strong position in our two Income models.  When the time is right, our income models will make some very nice, low risk returns which will be welcome to those who have been very patient for the last couple years of stagnant returns (3% in aggregate). 


That’s it for this quick update, please RSVP to the annual meeting as we are filling up and space is limited.  The Quarterly Change of Seasons will be out in the next week or so.


Oh my, colorful Colorado living up to it’s name right now.  Amazing!




Sam Jones