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Readers of this blog will recall that I was cautious and expected either sideways or bearish markets through the summer. I’ve noted the strong likelihood of a significant correction before the end of the summer. I also noted that virtually every bearish technical condition that I followed in 2011 appeared again this spring. The summer of 2011 was the last time we saw a 20%+ correction.
We elected to hold nearly 50% cash this summer in our managed platform – in fact, we’ve held over 50% for much of this time period –we’re still at 47% cash right now. So far, it would appear that my bearish prognosis was correct. Because of our decision to take profits on high beta stocks back in the spring (specifically technology and discretionary holdings), we managed to sell near the high point and preserve our gains. As such, our equity platform has earned positive returns for the year, despite a loss on the S&P500 (US market) and on the TSX300 (Canadian market) YTD.
Just as importantly, we have lots and lots of cash to take advantage of the blood that’s running on the streets! It is by limiting risk when most investors are bullish -then redeploying that cash when other investors are capitulating – ValueTrend has provided market- beating performance with lower risk over both long and short termed time frames. Although we run an Individually managed platform for our clients rather than a mutual fund, Morningstar data shows we have the lowest 5-year STD Deviation compared to all “Canadian Focused Equity” mutual fund managers in Canada. This, while demonstrating the 9th highest return in that category over the past 12 months (of 66 managers – see the spreadsheet here – we are noted as “DZ90”).
We expect that the next day or two will bring an oversold rally to the markets—especially in light of the (anticipated) intraday price reversal. Momentum studies such as RSI and Stochastics are screaming oversold. The key will be to let the market rally for a few days and see if it can stick. Often in market corrections such as this we get “dead cat bounces”—where markets will stage an oversold rally and then begin a new leg down in a week or two. The S&P500 chart above shows several examples of such “dead cat bounces” during the 2009 meltdown. Such bounces usually last several days, or even a couple of weeks before the downtrend resumes. Traders catch unsophisticated investors who have been taught to “buy the dips in a trap through these misleading rallies. For this reason, as tempting as it may be to buy right now, I am holding off to see how this market plays out for at least a few days before committing. The October lows of around 1860 on the S&P500 were tested intraday today, and support held. It is crucial that this level is not violated.