Finally, a correction

Brandon Snow's picture

Some comments from Bob Swanson, our portfolio manager who provides guidance to the team on asset allocation and macroeconomic trends:

We are trying to gauge the potential magnitude of the correction that may now be under way. First, I hope this is the last move we have to endure relating to political shenanigans. We overcame the November sell-off relating to the election, the December drop due to the fiscal cliff, and now the February dip due to the sequestration. I believe this should be a "garden variety" correction of 4 to 7%, not 10% or more, because there has been no indication of financial stress as highlighted below in the Global Financial Stress Indicator. The last correction of 9 to 10% was in May 2012, where the index hit 0.75 and moved above the 200-day moving average. Readings above the 200-day moving average and above the 0.5 level have in the last five years been accompanied by more dramatic sell-offs. While the current reading may be indicative of too much complacency, it does not suggest anything more severe than overbought conditions:

Source: Bloomberg

For the last four years, Bollinger bands have done well at providing the upper and lower trading limits of the S&P, being correct 10 out of 10 times on long positions and six out of 10 times on sell recommendations. The last buy signal occurred at 1410 on the S&P, with a more recent sell signal at 1460. Using other technicals, I would put support at the prior high in September at 1460, and if that gets breached, then lower in the 1435 range. This suggests a correction of 5 to 6% to the 1460 level or 6 to 7% to 1430. We have corrected 3% as at the time of writing.

- Bob Swanson

Author's note:  As I discussed recently, we had increased our cash positions as the market became extended. We are seeing a number of our preferred names come back into buy territory. In these types of sell-offs, everything tends to fall at similar rates, so we typically use them as opportunities to upgrade our portfolios to emphasize our best ideas – which I believe is a good practice for all investors.


Submitted by Sam Madio on

Can you provide more information on how this would impact how the portfolios are invested?

Brandon Snow's picture
Submitted by Brandon Snow on

Our funds have cash available to be invested. While the funds will be impacted by a market decline, it gives us an opportunity to re-evaluate all positions and invest that cash.




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