What The Playbook Says.
Our playbook is the situational analysis of markets based on historical results. We study how money flows into and out of securities along with the disciplines of fundamental and valuation analysis to see how markets have responded to historical events. The playbook helps by giving us different market scenarios to current trading activity and helps us formulate a game plan for current market events.
The game plan is a tactical and strategic allocation of clients assets based on what the playbook tells us has historically occurred. It gives us a direction for our various investment strategies and is further refined to the specific risk/reward parameters of our various client groups. Often the game plan can be implemented across the board in all client accounts or in a specific investment strategy. At other times portions of the game plan can be specifically implemented in individual client accounts where events or certain client events may warrant such action.
The playbook states that we start with what we know right now. We know that the market has basically given back all of its gains for 2010 in four trading sessions. We know that the market is now over sold short term but has not reached that point by our analysis in either of the intermediate or longer time frames that we follow. We know that there is both political & economic uncertainty in Europe, that there is an oil well spilling something like 40,000 gallons of crude into the Gulf of Mexico every day and we know that financial firms like Goldman Sachs continue to square off against the Government-a legacy of events that nearly ruined the world two years ago. We also know that the economic news here at home is getting better. These positive reports ended up being background noise on Friday but I think it will get more attention in the weeks ahead.
The playbook says that an improving economic environment coupled with the rapid decline we experienced last week usually equals a snap back advance. I think it is likely we'll see markets rally some point next week. We have now seen the inverse of the last two months advance. In this case stocks have likely fallen too far too fast. Stocks fell over 6% last week. That's a pretty healthy decline in a very short period of time and it means stocks are now as vulnerable to a reversal to the upside at some point as they were to a decline a few weeks ago. That advance could be violent and fast if investors get some sense that the European situation will somehow be resolved.
That does not necessarily mean that the correction is over. The market will give us clues about its character by how stocks react on any advance. The playbook tells us that stocks should now struggle as they encounter higher price levels. This is because traders who are holding shares at higher prices often will sell as prices advance and they get back or close to even money. This is what is known as resistance and it's often an initial barrier to price advance. A market that can eat through these various resistance levels would be indicative of one that wants to shrug off our current events and resume its rally. Likewise a rally that fails from these levels and turns decisively south could indicate that we have a bigger problem on our hands than is currently indicated. In that case we will activate additional defensive tactics for our clients. In general this would likely mean another level of raising cash.
Since stocks are short term over sold, the game plan says to look for tactical trading opportunities in some of our more aggressive trading strategies and for more aggressive client accounts. Eventually stocks will reach a point of being so over sold as to be attractive to a larger majority of our client base and our investment strategies. A few more days like last week could mean that point arrives soon. Then we will look to add to longer term client holdings. As usual we primarily focus on ETFs for equity exposure.
Besides some of our broader index strategies, we are attracted to ETFs that currently have attractive yields as well as the potential for capital appreciation. For our growth oriented investments areas of concentration include energy, technology, certain segments of health care and certain segments in financial services. I also think that it is time to take a more serious look at foreign ETFs given the nature of this sell off which has more severely affected their markets than here in the US.
I discussed yesterday why I think our issues are short term in nature. I still think the weight of the evidence suggests that stocks will be higher by year end. But I want to again remind us what the consigliere-the gentlemen who taught me this business-used to say, "stocks will do what they have to do to prove the most amount of people wrong". Today I think what would cause the most pain is for stocks to do.....nothing.
I think its likely that once the markets find some level of equilibrium that stocks could go to sleep for perhaps 4-5 months as they digest the last year's gains. The old phrase "sell in May and go away!" could be on target this summer and stocks could be range bound until the leaves turn color in the fall. The market has been telling us for a few weeks that a change in its character was coming. We've been in need of a wash out for a few months. A rest while stocks churn about in a trading range could set the stage for better opportunities later in the year.
*Long ETFs related to the S&P 500 in client and personal accounts. The information presented here should be used for informational purposes and relates solely to the management of client accounts by our firm. Casual readers of this blog should consult their own investment advisor or do their own homework before acting on any information posted here. This should not be construed as a guarantee that any future event shall occur. Since I only know the unique characteristics of my clients outside readers of this blog use this information at their own risk.
The playbook states that we start with what we know right now. We know that the market has basically given back all of its gains for 2010 in four trading sessions. We know that the market is now over sold short term but has not reached that point by our analysis in either of the intermediate or longer time frames that we follow. We know that there is both political & economic uncertainty in Europe, that there is an oil well spilling something like 40,000 gallons of crude into the Gulf of Mexico every day and we know that financial firms like Goldman Sachs continue to square off against the Government-a legacy of events that nearly ruined the world two years ago. We also know that the economic news here at home is getting better. These positive reports ended up being background noise on Friday but I think it will get more attention in the weeks ahead.
The playbook says that an improving economic environment coupled with the rapid decline we experienced last week usually equals a snap back advance. I think it is likely we'll see markets rally some point next week. We have now seen the inverse of the last two months advance. In this case stocks have likely fallen too far too fast. Stocks fell over 6% last week. That's a pretty healthy decline in a very short period of time and it means stocks are now as vulnerable to a reversal to the upside at some point as they were to a decline a few weeks ago. That advance could be violent and fast if investors get some sense that the European situation will somehow be resolved.
That does not necessarily mean that the correction is over. The market will give us clues about its character by how stocks react on any advance. The playbook tells us that stocks should now struggle as they encounter higher price levels. This is because traders who are holding shares at higher prices often will sell as prices advance and they get back or close to even money. This is what is known as resistance and it's often an initial barrier to price advance. A market that can eat through these various resistance levels would be indicative of one that wants to shrug off our current events and resume its rally. Likewise a rally that fails from these levels and turns decisively south could indicate that we have a bigger problem on our hands than is currently indicated. In that case we will activate additional defensive tactics for our clients. In general this would likely mean another level of raising cash.
Since stocks are short term over sold, the game plan says to look for tactical trading opportunities in some of our more aggressive trading strategies and for more aggressive client accounts. Eventually stocks will reach a point of being so over sold as to be attractive to a larger majority of our client base and our investment strategies. A few more days like last week could mean that point arrives soon. Then we will look to add to longer term client holdings. As usual we primarily focus on ETFs for equity exposure.
Besides some of our broader index strategies, we are attracted to ETFs that currently have attractive yields as well as the potential for capital appreciation. For our growth oriented investments areas of concentration include energy, technology, certain segments of health care and certain segments in financial services. I also think that it is time to take a more serious look at foreign ETFs given the nature of this sell off which has more severely affected their markets than here in the US.
I discussed yesterday why I think our issues are short term in nature. I still think the weight of the evidence suggests that stocks will be higher by year end. But I want to again remind us what the consigliere-the gentlemen who taught me this business-used to say, "stocks will do what they have to do to prove the most amount of people wrong". Today I think what would cause the most pain is for stocks to do.....nothing.
I think its likely that once the markets find some level of equilibrium that stocks could go to sleep for perhaps 4-5 months as they digest the last year's gains. The old phrase "sell in May and go away!" could be on target this summer and stocks could be range bound until the leaves turn color in the fall. The market has been telling us for a few weeks that a change in its character was coming. We've been in need of a wash out for a few months. A rest while stocks churn about in a trading range could set the stage for better opportunities later in the year.
*Long ETFs related to the S&P 500 in client and personal accounts. The information presented here should be used for informational purposes and relates solely to the management of client accounts by our firm. Casual readers of this blog should consult their own investment advisor or do their own homework before acting on any information posted here. This should not be construed as a guarantee that any future event shall occur. Since I only know the unique characteristics of my clients outside readers of this blog use this information at their own risk.
posted by CR English at 8:41 AM
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