Managing Money In a Directionless Market

Looking for direction. That phrase is what defines the market to me currently. If you look at any chart of the major indexes they have been in a solid uptrend off the October and December lows, but now they have taken a right turn and tested short term support levels. The modest bounce on Wednesday was the collective market taking a deep breath to alleviate some of the anxiety from the five day selling spree. What has changed to create the current directionless market? That is the million dollar question of the moment. I wrote recently about confidence of the investor being challenged as the answer to that question and it is still my take. The issues relative to Europe, the Fed taking away the free-money punchbowl, economic data showing some slowing, question marks relative to forward earnings and the price of gasoline. They have all played a role in the process of shaking the confidence of the investor. When you lose your conviction, the clarity of direction is lost. For me that defines the current market environment.

The chart below of the S&P 500 index illustrates what is described above. The blue trendline is the uptrend off the October low. The index is challenging the trendline as well as the 50 day SMA on the downside. A break of those support levels adds another negative to the confidence of the investor. The triple top formation is another negative to technicians as it broke below the 1387 mark on Monday. The technical data has been adding up to short term weakness in the charts. You say, I don’t use technical data as a deciding factor about my investments…. Okay, but they do give you a picture of what the investor is doing day to day and week to week. This picture says confidence short term is shaken. If the fundamental data gives you conviction to own stocks, or in this case the S&P 500 index, shouldn’t this give you an indication to buy more at some point? The charts show investor action in a picture and thus validates or invalidates our fundamental strategies. The point is simple, the investor is losing confidence short term. If you, as an investor, have conviction in the longer term upside, this is an opportunity to add to your positions on the pullback test. If however, you are a short term investor, you have hit two sell signals with a third in play. The chart defines in a picture the response to the data being released about Europe, the Fed, earnings, the consumer, gasoline prices, etc. Simply put, short term the conviction of the uptrend is in question.

Before you stone me, and tell me the upside opportunity remains while spout off all the data points that are positive… I understand. I see the positive and I like what is happening relative to the longer term picture. BUT, the charts are telling me to have an escape plan if my beliefs relative to that longer term picture aren’t true. Ask yourself this question, “if what you thought to be true wasn’t, when would you want to know about it?”Just because you are smart doesn’t mean you don’t have blind spots. If all the prophecies about the upside of this market aren’t true, when do we want to know about it? 1340 on the S&P 500 index or 1267? A break of both support levels are negative to the trend currently in play. One is just worse than the other. I am not telling you the market is going lower… I am telling you to be prepared if it does.

If the index above moves below 1340 tests support at 1300 and bounces back to 1575 and you hold your positions through that process are you right? Only if your discipline and strategy defines that is the way you want to manage your portfolio. If you sell on the break of support at 1376 and the same scenario happens with the drop to 1300, bounces higher off support, and you add your positions back at 1345, and the index moves to 1575… are you right? Only if your discipline and strategy defines that is the way you want to manage your portfolio. Money management is about YOU and YOUR strategy for managing YOUR money. The key is discipline to implement it in the face of an emotional and irrational market environment.

The investor lacks confidence short term. If they find it, the market will rally back and move higher. If it continues to erode and fear becomes a bigger factor, support will be broken and the downside will accelerate short term. The key for me is in the chart validating which is going to take place. Remember, if what you thought to be true (the index moving to 1575 by year end) wasn’t, when would you want to know about it? Follow your strategy with discipline and either way you will be right over time. It is about accomplishing the goal, not being right.