I thought I would pull some comments (excluding the individual stock names) from an update we just emailed out to our clients. I want to emphasize that these comments should not be taken as investment advice. You have to make your own decisions, or consult with a qualified advisor. I can be wrong – and I am simply offering up my personal take on the markets at this time and how I am playing it.
It’s not often that we are cash-heavy in the ValueTrend Equity Platform over the winter months. After all, the market tends, on average, to perform well from December to May. This winter has been a little atypical. That is, this winter has delivered a roller coaster ride via a massive plunge in December, followed by a sharp 50% retracement of that plunge in January. There are a few problems with the recent rally, which has inspired us to raise 40% cash in the past week. We’re not convinced that we want to be fully exposed to stocks for these reasons:
- Oversold to overbought: Stock markets have gone from being extremely oversold on December 24th, to overbought as of last week. This, according to some of the technical indicators we observe.
- Overdone markets tend to correct themselves in either direction: Just as the oversold situation corrected itself by rallying from December to last week, the overbought markets have the potential to correct themselves through a selloff.
- In a bear market, you often get a 3-leg downtrend…aka the Elliott Wave counter-trend waves: The 2nd of those 3 legs is a rally – like we just had.
- If the rally is going to fail, it will fail after retracing about half of the loss of that first selloff leg: This is not from the EWT practice surrounding Fibonacci retracements. This 50% retracement tendency is a statistical tendency first documented by Ian Farrell, a fellow Technical Analyst, who presented these findings when he did his CMT thesis. We are now at the half way point of retracing the recent selloff. This does not mean markets will fall from here, but it does mean that odds are increasing they will.
- Both the US indices and the Canadian TSX 300 reached technical resistance as they reach the 50% retracement point: This adds another hurdle against further upside, set against an already overbought market.
Below is a very busy chart illustrating all of the above points.
We sold individual stocks as they reached technical resistance points within our portfolio. We also took some of our USD off the table as well- per this blog comment.
We currently have a few stocks left on our sell list, but we are content with the 40% cash weighting at this time. Meanwhile, we are watching for a technical break to buy into emerging markets, NA index ETF’s and a few individual stocks.
- Keith was on BNN last Thursday January 24th wearing his funky new violet colored suit. Click here to watch the full show.
- Keith is speaking at the Orlando MoneyShow on Friday February 8th. Click here to read the details, and for free registration to the show, should you be in Orlando on that date.
- Here is a link to Keith’s last blog stock market analysis.