When will this big pullback finally happen? That was one of the headlines on CNBC last night. I am sure it got plenty of attention after the selling on Wednesday. The primary reasons for a pullback remain in play, having been made consistently and continuously over the last six weeks are still valid…
… The broad market indexes are overbought. Yes, technically we can validate that is a true statement relative to the data. However, we have continued to argue that markets can remain overbought for extended periods of time if enough liquidity and conviction exits. Thus, unto itself this statement or argument will not be enough to shift the uptrend in play.
… We have seen a protracted period of low volatility. Yes, The VIX index in relationship to the S&P 500 index validates that to be a true statement. However, that doesn’t influence the trend of the market. In fact, on Tuesday when everyone thought the M&A activity would continue to provide fuel for the uptrend to continue the VIX index dropped lower and SXVY gained more than 4%. Thus, volatility is not a trend changing event by itself.
… There is still slow economic growth. Yes, that is another true statement and you could add earning and revenue growth to the statement as well. However, the Fed is still gainfully engaged in putting money into the system via bond purchases which provides liquidity to the market. Based on the fundamental data for earnings and the economy, the markets should not be progressing at the current rate of speed. However, it will take the Fed stepping away, and allowing the market to stand on it’s own two feet for the reality of the fundamental data to matter to investors. The FOMC minutes released on Wednesday was evidence of the potential reaction you may see from investors if the Fed steps back from the money dump they are currently exercising. That is why Wednesday’s release of the minutes was a wake up call for some investors. Just the conversation among the Fed Presidents stopping or changing the process got investors to react. What if they actually act?
The fact is no one really knows until it happens. Believe me, if what many think will happen, happens, you will know about it. The question from my view remains, are we ready to manage the risk of the event? In our webinar on Tuesday night we discussed the importance of risk management relative to every position within your portfolio. (Visit the home page for more information on how to view the webinar.) If the selling on Wednesday is the start then we need to tighten our stops relative to the risk we are willing to accept going forward. Take that as a homework assignment today and fine tune your portfolio.
What about bonds? There is plenty of talk about stocks being overbought, but precious little being said about bonds being oversold. If there is a correction or pullback on the horizon I would expect bonds to bounce in price as money gets defensive and looks for a shelter from a coming storm.
Gold has accelerated to the downside extending the current trend. How low does it go? Good question, but the better question is how much GLL do we own? The downside play was recommend relative to gold and silver here over the last several months. The issue with gold remains a demand issue more than an inflation belief. Looking at the chart of gold you can see clearly the move lower within the down trending trading range on February 11th. That move has accelerated with the break lower on Wednesday losing $40.80 to $1564.10. The short play is still on and the downside in play. Watch, manage your risk of a reversal on the metal as emotions rise.
Oil fell 2% on Wednesday as well closing below support at $94.83 and is $93.68 in pre-market trading. This is worthy our attention as well. Crude could test support at the $90 level short term if the selling accelerates in the commodity. Commodities are one sector, across the board, that has been under selling pressure. We stopped out of oil on the move Wednesday, but the downside play could develop as an opportunity going forward.
The key is a disciplined strategy to capture the move of the markets going forward. Stay focused, manage your risk as this plays out, and don’t assume anything.