Last week I made a change within our tactical asset allocation strategies that significantly reduced our exposure to stocks and increased the allocation to bonds and cash.
The stock market had been showing some signs of weakness beginning last summer in August and September. The markets did begin to rebound into the final months of 2015, only to reverse back down in 2016.
Fundamentally things seem ok, however the markets are not reacting in a way that says everything is ok. Low oil prices and a possible slowdown in China did not suggest to us that we were heading for a major drop in the market, but the technical indicators continued to break down. Which is what is prompting the changes we are making.
As I had mentioned on my last market update call, there were 3 primary indicators I was watching very closely.
1. The October 2014 support level on the S&P 500 at around 1870. This low price held up in August and September of 2015 and in early 2016 it appeared like that support level would hold. It did not. On January 20th the S&P 500 violated that support level.
2. The relative strength chart that shows the S&P 500 vs. The aggregate bond index. This indicator had still been favoring stocks over bonds, but after the market closed on February 11th, that indicator had also moved negative.
3. And finally the DALI rankings of the 6 broad asset classes. Add: Using Dorsey Wright Research, each of the 6 Broad asset classes are ranked on a relative strength basis against each other. This is really the key driver in our asset allocation decisions. Even though stocks had been pulling back they were still ranked in the number one position, which is why we kept our position in stocks. Sadly this indicator also has changed.
Current DALI Dynamic Asset Level Investing) Rankings as of February 12th 2016.
1. Fixed Income
3. US Stocks
6. International Equities
Keep in mind that the move is simply being defensive. Although we don’t know for sure what direction the markets will go from here, there was enough negative with the technical indicators to prompt the change.
If you have any questions at all, please do not hesitate to call. I will be scheduling another market update call sometime in the next week.
All indices are unmanaged and may not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Barclays Capital Aggregate Bond Index is an unmanaged market capitalization-weighted index of most intermediate term U.S. traded investment grade, fixed rate, non-convertible and taxable bond market securities including government agency, corporate, mortgage-backed and some foreign bonds.