Founder & Chairman
Could the markets be starting to crack? Maybe. It’s been a little while since they’ve tested Mr. Bernanke and company. The bull market has been in full effect, the economic data had been improving (it still is, however, the pace is slowing) bonds have stayed in what you might call a “sweet spot” and sentiment has clearly been very positive. Recently, however, things have gotten pretty interesting in Japan. In spite of mass amounts of their own “quantitative easing”, the Japanese bond market has cratered, sending interest rates significantly higher and both bond and equity prices much lower. It’s impossible to say at this point, whether this marks an important turning point, or whether it’s just another blip that the central bankers will mitigate away. Rest assured, we are paying very close attention to what is going on there, as we’ve maintained for a few years now, that Japan may in some respects represent a glimpse of what could be coming here. The last shot fired came from the Japanese bond market, the next move likely comes from the central banks. Stay tuned.
As for our portfolios, the last round of changes we made turned out to be good ones. Given recent developments in the markets, more changes are required. It’s probably time to reduce risk to some degree, without however, reducing equity exposure. The overall macro economic environment appears to be favorable, but it may be deteriorating to some degree. The adjustments we are making will allow us to continue to participate in the bull market should it continue, but they will also help to reduce some potential volatility should the deterioration continue. The algorithm is still telling us that the coast is clear, for now, in spite of the recent volatility. In the big picture, it’s impossible to time the short-term swings, in particular, due to central bank policy and the massive influence the Feds have had on global markets. Even the most experienced market professionals have fallen victim to being “whipsawed” by the markets, meaning stocks dropped just enough to prompt them to sell some equities, only to watch the Feds step right in, and almost immediately send the markets roaring higher. Not only did the sellers cement their losses, but they get stuck on the sidelines because they can’t justify paying even higher prices for the stocks they just sold. Fortunately, our algorithm is designed to be a little more deliberate, and it generally doesn’t react to the shorter-term swings, and we haven’t gotten whipsawed as a result.
Some of our clients have asked us about the “stay away in May” concept, and why haven’t we gotten out already. There are two primary reasons why we’ve not engaged that strategy. First, Federal Reserve policy has really minimized market volatility and the bigger risk recently has been to avoid the market, and miss out on potential returns. Secondly, the algorithm we’ve employed is a quantum leap forward and we believe puts us in a much better position to manage potential volatility. The algorithm will give us a sell signal, if certain conditions are met, and we will immediately go to cash until it gives us the all clear sign. While no system is fool-proof, we believe this cutting edge technology is far and away the best way to mitigate risk without sacrificing the potential for solid performance.
To reiterate, we have made some adjustments to our portfolios. If you’re on the automatic change plan, we’ve already made the adjustments to your investments and you will be receiving confirmations soon. If you haven’t yet given us authorization to automatically update your portfolios when we make changes to the models (Why not?) then you will have to send us an email or call the office to give us permission to update your portfolio. If we don’t have your authorization, we cannot make changes to your accounts.
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Securities offered through First Allied Securities, Inc., A Registered Broker/Dealer, Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services, Inc. A Registered Investment Adviser.
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