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We
updated our similar
markets study last night. The results are similar to the first pass. As
mentioned in the July 18 video
(see below), the slope of the S&P 500's 200-day moving average remains a
key differentiator between markets that should have been sold and markets
that warranted a more balanced approach to risk management.
The
current slope of the S&P 500's 200-day is basically flat, telling us to
reduce risk, but not to throw in the towel yet. If the slope of the 200-day
turns down especially for more than a few days, we will reduce risk further.
The
green arrows in the charts below show the midpoint of the similar historical
periods as identified by the CCM Bull Market Sustainability Index (BMSI) and
CCM 80-20 Correction Index (80-20
CI). Notice in 1998 the slope of the 200-day flattened out, but did not turn
over in an obvious manner. Stocks recovered in 1998 and went on to make new
highs.
In
1999, we had a similar situation; the slope of the 200-day flattened out, but
did not turn over in an obvious manner. Stocks recovered in 1999 and went on
to make new highs.
In
2000, the bear market began in earnest after the slope of the 200-day rolled
over in a convincing manner.
The
2007-2009 bear market also ramped up its bearish bias when the slope of the
200-day turned negative.
As
we mentioned in the video above, we do not feel 1984 is all that good a proxy
for the current technical backdrop. However, when the slope of the 200-day
turned up, it was a bullish signal.
Given
the recent deterioration in the market's risk-reward profile, we have reduced
our mix of risk assets and more conservative assets to roughly 50%-50%
depending on the needs and risk tolerance of the client. If the market can
find its footing soon, we will maintain that mix for a time. If we see
further deterioration, we will raise more cash. The risk portion of our
portfolio is mainly comprised of the S&P 500 Index (SPY) and mid-caps
(IJK). Our conservative portion is primarily made up of cash, bonds, gold
(GLD), and silver (SLV). Our gold and silver represent a hedge against the
possible further debasement of paper currencies. The Fed meets next Tuesday;
we believe the odds are decent they will make some precious-metal-friendly
comments
Chris Ciovacco
Ciovacco
Capital
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