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Market Health Still Bouncing Around

Over the past week we got more of the same. The market is bouncing around and so are my core health indicators. None of them have deteriorated enough to change any of our core portfolio allocations. All of them are 100% long. At the moment there just isn’t anything significant happening in the market or underlying indicators. As a result, I’ve got nothing more to say. Enjoy the weekend everyone!

150529markethealth

 
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3 Responses

  1. Tom

    I’m just concerned about what would happen one week if there is a sudden 5 to 10% drop without any warning or change in the underlying indicators and worse than that, what if the market fails to bounce back due to re-pricing of risk and multiples? After all, the main factor responsible for quick rebounds is no longer present for the US markets (QE) and to make matters worse, the threat of rate hikes is hanging like a sword. Stock buybacks are the final thing supporting the markets at present. Let’s hope they do their job of preventing a drop and inducing quick bounce backs.

    • Blair

      There is always a risk of a sudden 5 to 10% drop in the market, but those types of events don’t often happen in a vacuum (unless it is caused by an event like an earthquake or fire that levels a city). Even the crash of 1987 where the the S&P 500 index (SPX) fell over 20% in one day was preceded by a month of decline totaling more than 16%. Most of it happened the week preceding black Monday which saw SPX fall more than 9%. On the Friday before black Monday SPX fell over 5%. For those of us old enough to have watched it happen, that was the day we all started to panic…but we had enough evidence before hand to be very concerned.

      The flash crash in May of 2010 appeared to come out of nowhere (after a three month rally), but the 3% drop the preceding week caused my market risk indicator to signal before the crash. Currently, one of the four components of the risk indicator is bouncing back and forth between warning. The other three are still pretty far away, but should react to a swift drop in the market. We make take a loss of 5 to 10% before adding an aggressive hedge, but I suspect we’ll be well protected if the decline continues into something larger.

      I guess my point is that we usually have plenty of warning before a bear market begins. But, on those occasions where it starts with a steep drop my market risk indicator reacts fairly quickly. You can see more info here: http://www.downsidehedge.com/market-risk-indicator/

      • Tom

        All good points, but I don’t know why I have a feeling it is different this time. The extraordinary aggressive actions taken by the Fed in the last 6 years is what makes it different this time, I guess. Investors want the markets to keep going up and if the markets do not cooperate due to the juice having been stopped by the Fed, then a day might come when all of a sudden everyone might throw in the towel all at once. I don’t think we will have a bear market, rather that after a quick and sudden 10% drop, the markets may struggle to bounce back for another year or so. There may not be enough catalyst to fall further nor to go back up i.e. the market may be stuck in a limbo. Hopefully it does not play out like that.

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