I just reread my newsletter of January 7 2016, and the tone of this one will be the exact opposite! Things are changing!
For the first time in my career, the Growth oriented accounts that I manage are roughly 50% in cash. Here is why.
The correction that we experienced this January and February was different than the previous several that we have had. In the past several corrections, the sectors that led the recovery were the same sectors that were in leadership before correcting, i.e., healthcare, technology, and the growth style of portfolio management (using asset class terminology, large cap and small cap growth). This was seen in raw performance, as well as Relative Strength (1).
This time, things were different. Not only did the healthcare sector rotate out of leadership, so did the Small and Mid Cap parts of the U.S. market. More importantly, of the six major global asset classes (US Stocks, International Stocks, Cash, Bonds, Commodities, and Currencies), U.S. Stocks fell from its #1 position to # 3. International fell from #2 to #6. Bonds became #1, and Cash became #2! This is a very defensive indicator.
A healthy market climbs three steps up, two steps back. A correction is the opposite, three steps down, two steps up. You may want to write these onto paper to really see it, but using the S&P 500 index, here is what the steps are looking like:
July 2015, 2130 November 2015, 2110 last week, 2070
August 2015, 1870 February 2016, 1820 tomorrow ??
Note that the rally’s up are to a lower high, the corrections down to a lower low.
We NEVER know how far up or down it will take us. Somehow the email that announces the bottom and top always ends up in my spam folder, never to be found!
So the big question I have been grappling with this quarter, is this simply a leadership change in the global markets, or is this the precursor to something more ominous?
Because of how this selloff occurred, and that Cash moved above US Stocks, during this correction I sold stuff off rather than hoping it would recover. I am now out of all my small cap positions, reduced my large cap holding, and have sold most of healthcare.
None of us are interested in experiencing another 20082009. I consider managing your money to be a marathon, not a sprint. So when the trends are not clear, I am happy to sit on cash.
Why is this happening? The answer to that is best debated in the bars at night by all those highly paid market strategists and economists. As a student of the markets, I choose to see what is happening now, rather than second guess what will happen tomorrow.
I am watching the dollar most carefully. If this is simply a change in leadership, what we are experiencing could be attributed to a change in the dollar, from one of a strengthening, to a weakening dollar environment. When the dollar is strong, as it has been for several years, one is best off owning stocks right here in the United States. When the dollar is falling it is best to move into stocks of commodity based companies and industries, and into emerging market countries.
This could explain why gold moved up on the relative strength charts causing me to buy it in February (ticker GLD). In March I added precious metal stocks (ticker GDX) and metals and mining (symbol XME). I have selected a couple emerging markets positions to follow and will add to your portfolio if the evidence supports it.
That’s it for now. Please do not hesitate to call with any questions.
Thank you for your continued Trust and Confidence.
Gregory G. Riggs, CFP
Accredited Investment Fiduciary
Note 1, Relative Strength charts are provided to me by Dorsey Wright and Associates, whose research I subscribe too.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.
Index returns are for illustrative purposes only and do not represent actual fund performance. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Securities & Investment Advisory Services offered through KMS Financial Services, Inc. KMS is a FINRA registered broker/dealer and SEC Registered Investment Advisory firm.