Review of Defensive Disciplines in Order
The next few days are important for the current rally. As mentioned on April 11, the markets have weakened noticeably, but not to a point yet where defensive action is warranted (as of the close on April 11) - that may or may not change as early as today.
This morning we are reviewing our “top” and “correction” models with a particular focus on recent market peaks that occurred on:
- June 12, 2009
- January 19, 2010
- April 23, 2010
- November 5, 2010
- February 18, 2011
Each bull market establishes its own character and tolerances for each technical indicator. Our job is to determine the difference between (a) readings that may signify the need to take some defensive action and (b) readings that should be treated as normal volatility within a healthy market. Studying (b) allows us to better understand when to leave things alone. Studying (a) helps us understand when to pay attention and prepare for possible defensive action. As of Monday’s close, we stood in (b) or “leave it alone” territory, but we are getting closer to (a) or “action needed” territory.
We remain concerned about the approaching end of QE2 - a relatively rare circumstance that does not have much in terms of historical precedent. We are also concerned about recent sentiment readings which have come in excessively in favor of the bulls, which can be a contrarian indicator for stocks. Earnings are facing high expectations which can lead to disappointment.
All things being equal, we prefer to leave things alone in a bull market, but we cannot ignore bearish signals if they begin to surface. We have recently commented on the need to remain flexible during the current advance, something we still believe to be important.
