Since the start of the year, I have been very cautious on the stock market, primarily due to market sentiment being at rally killing levels along with finally losing the tailwind of the positive calendar effects. The risk/reward looked so unfavorable that we took across the board action in many of our portfolios raising cash to even 100% in some cases, levels not seen since 2012.
On average the major indices have gone nowhere for the past month with the Dow being the weakest and the Nasdaq 100 being the strongest. Over the past two days, the stock market has fallen with a slew of international news and earnings being blamed. That’s only partially true. If stocks were emerging from a low, they would have ignored the “bad” news and powered higher. Stocks were looking for an excuse to pullback and they got it.
My target has been for a 5-10% decline, the largest since 2012, and that’s still the case. I reference the lows hit in December when the Fed announced the taper as price levels to watch in a general sense.
While the carnage has been real this week, market internals remain very solid and should lead to much higher prices after the weakness ends. I remain steadfast in my belief that while the bull market is old and wrinkly it is very much alive. The DNA markers we typically see when a bull market ends are simply not there at this time and they will take weeks, months or even quarters to appear.
For now, the short-term decline continues and we will begin looking for signs of a bottom at the -5% mark.
