12-02-2021: Caution Ahead? So What's the Plan?
Since making new all-time highs last week, the markets have had some large drops with the S&P 500 trading down about 3.3% off its highs. Today saw a nice recovery, but the market is still down from its recent highs.
Is that a reason to get out of the market? Let’s take a closer look.
Here’s the latest 3-year chart of SPY, the well-known S&P 500 ETF. The blue, red, and green lines on this chart are the 10-week, 20-week, and 40-week moving averages respectively. These charts are all from StockCharts.com.
The red line, which is the 20-week moving average, is the one that gets my attention. As you can see, there are seven previous times in the past 3 years (see circles in the chart, above) that the market moved below this particular moving average. Six of those times the market bounced back higher and new all-time highs have been made along the way. Only one time did this particular moving average move below the red line and continued substantially lower. I use this 20-week moving average as an “attention-getter”. When the market drops down to and/or goes below this line, I tighten the exit strategies on the stocks and ETFs that my clients and I own.
Now, here’s another chart of the S&P 500, but instead of it being market-cap weighted like the S&P is, this is a chart of an equal-weighted index. In other words, each stock has the same weight in the index. RSP is the ticker symbol for this ETF.
This is a chart that I watch closely when the ETF moves low enough to touch or move below the 40-week moving average (the green line). It has moved down and touched that line 5 times in the past 3 years, but what is interesting is the market only dropped below the 40-week moving average one time (February 2020). And it is almost got there again yesterday but has now (for now) jumped back up a bit today.
What does this mean? It means that there are a lot of stocks that are performing poorly in this in the S&P 500; many of which do not get a lot of airtime like the big names, such as AAPL, MSFT, AMZN, TSLA, GOOGL, NVDA, and FB. These big-name stocks tend to mask the poor performance of the vast majority of stocks in the index. These “smaller” hidden stocks include some of the largest companies in the world. Their businesses might be good, but their stock prices are lagging.
This is what concerns me. It’s certainly possible that the market rebounds from here and makes new all-time highs. We’ve seen these rebounds almost every time these 20-week and 40-week moving averages have been breached.
Several of the stocks that my clients and I own include some of the above-mentioned big names. I’m not going to blindly sell these stocks because of fear the markets will continue to move lower. No… I want to see a confirmation that the market has moved into a bear-trend and I won’t sell our holdings unless they trigger their respective stops. I want to ride these high-quality stocks for as long as they keep moving higher.
That doesn’t mean I’m blind to the current market conditions; especially when some of those conditions are indicating that caution is advised in the near-term. With the market teetering on a fulcrum that could see it move strongly upward or fall off into a bear-market swoon, here is my plan for my clients.
I have tightened the stops on every position in all four of the Turner Capital models. This means I’m willing to take advantage of further moves to the upside, but will exit these positions near the top if they too get caught up in the downward pressure of the market. If you’re one of my clients, don’t be surprised to see us do quite a bit of selling if the market continues to sell off. If that happens, we will hold cash until a bear-market trend is confirmed where we will begin our bear-market investment strategy, utilizing inverse ETFs in 3 of our 4 portfolio models.
We all know that a bear market is going to happen sooner or later. It might be just beyond the horizon. No one knows for sure, but I do know that every bear market starts at all-time market highs. The current signals are telling us to proceed with caution and that’s exactly what I’m doing.
Unlike the buy-and-hold-into-oblivion crowd, we will only hold onto current positions until the market forces them down to their pre-determined sell point. Then, the fun really begins… the bear-market where inverse ETFs are designed to grow capital as the market tanks.