Attempting to pick market tops and bottoms is a fool’s game, as evidenced by the continued calls for a market correction over the past six to eight weeks, as stocks have moved higher. However, trying to assess the market’s risk-reward profile, and the odds of a correction beginning, can be quite useful from a planning perspective.
We can use the CCM Bull Market Sustainability Index (BMSI) and some back-of-the envelope calculations to project future BMSI levels, based on current BMSI levels and recent trends in numerous technical indicators. This type of projection is not used to make decisions today, but it does help us better prepare for possible chess moves over the next few weeks. This is a planning exercise, not an execution exercise.
Based on what we see today, we will be relatively conservative with deploying new cash. We are willing to hold our long positions until we see more evidence of possible corrective activity. We also may begin planning for possible risk-reduction strategies (what to sell, review possible hedges, etc.). This type of analysis needs to be updated frequently and can be somewhat fluid, so we will keep a close eye on the variables involved. The important stock market levels outlined in How High Can Stocks Go? provide another method to monitor correction probabilities.