Time to step back and gain some clarity with the broad market indexes. The Dow, as well publicized last week, hit a new all time high. The NASDAQ eclipsed the 2007 highs last February, and the S&P 500 index is pushing towards the 2007 high at 1576 inch by inch each day. Other than making great headlines, and money, what does all that mean for you and I as investors?
To start with, concern/caution comes to mind. The challenge is separating the news from reality. The news causes volatility short term and reality creates the trend lines. Thus, if we simply look at the Volatility Index (VIX) we will see the impact of the day-to-day news, and the chart of the S&P 500 index shows the reality of what investors believe. The short term trend off the November low is up. The VIX index is currently well below 15, in fact it fell to 11.5 on Monday, showing little in terms of news or anxiety impact on the broad index. Simple conclusion… hold on to the index and let nature take it’s course. The problem… those talking heads everywhere pontificating about the economy, the government taxes or intervention into free markets, global recession, China’s economy weakness, etc, etc, etc.
This is where you and I have to separate what we think will happen longer term versus what is happening now. The outlook is somewhat negative if what analyst think will happen, happens. The immediate reality is that things are improving economically and psychologically. No, they are not stellar, nor for that matter are they even good, simply better. That is enough when the sentiment, volatility index and psyche of the investor wants to own stocks. Thus, go with the trend, set you absolute exit points based on your time horizon, and enjoy the ride. After all, the up trends are why we put our money at risk in the market to begin with.
The chart below is my version of clarity relative to the broad index. The bold white line is the S&P 500 index and the 10 colored lines around the index are the 10 major sectors ETFs of the index that represent each. The point of this chart is to see the leadership of the market from a specific pivot point. The chart below goes back to the November 15th low as the starting point. From left to right, the trend is up for the index itself, and if you note all ten sector ETFs are moving in an uptrend as well. Albeit some are weaker than others, but then that is the reason to look at the chart, finding the leaders and putting our money to work in those sectors.
The two vertical lines show the tests or pullbacks in the trend line. Those also are pivot point to look at the leadership coming off each test. That leadership can depict rotation or new leadership developing at each point. The primary leadership has been financials, basic materials, consumer discretionary and healthcare. Thus, being overweight those sectors during this trend has been the priority. Equally being underweight the laggards such as telecom and technology has benefited as well.
This is why we developed our S&P 500 Rotation Model. It allows us to track these sectors and rotate with the index to the leaders and avoid the losers or laggards. Simple? Yes, with the exception of over-thinking or listening to the analyst versus the charts confirmed by the fundamentals. The most important thing is to have a defined strategy to investing surrounded by discipline. That is what the model is focused on, a simple defined strategy of follow the leaders (trends), avoid the losers (trends), and watch the laggards. A disciplined entry, stop and target for each position taken. Risk management strategy is implemented daily of the positions held. Simple, direct and effect tool for managing money.
The defined trend short term is up. Trusting that trend is a whole different issue. That is why a defined discipline will put you into the position, manage the noise from the talking heads and analyst, set stops to protect against the downside risk, and focus on the following the trend, up or down. Most important is a strategy focused on you and managing your money.