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The Technical Viewpoint

The Technical Viewpoint

| March 13, 2018
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And just like that, we are into March!  While our 2018 winter weather likely will not make a notable entry in the record books, the past month of market action just might!  It was not long after February began that we experienced the first 10% correction in almost two years, and the volatility that had been missing in 2017 roared back to life. 

The market correction was swift in nature, which fueled a feeling of unease; however, from a technical perspective, it can be viewed as relatively normal.  For perspective, the average number of 10% drawdowns per decade, going back to 1927, is 9.6, or roughly once per year.  What has been somewhat abnormal are the sustained periods without a correction that we have seen in recent years.  Since 2010, we have had just five instances, but this correction brought the major market indexes back to their mean, as they had been trading in historically overbought territory. 

It is important to note that this recent correction did not cause any major rotation in our Dynamic Asset Level Investing Tool (DALI) rankings from an asset class or sector perspective.  Despite the volatility we experienced during the global equity sell-off, the major US and international indices each experienced a peak-to-trough drawdown in the neighborhood of 10%, US Equities remain planted in the #1 position in DALI, with International Equities trailing by a narrow spread of 16 signals.  From a sector perspective, Technology continues to lead the indices higher while Energy continued to lag over the past month after showing some brief signs of life in January.  Most of the DALI rankings have remained static with one notable exception:  Commodities.  In the last 10 days of January, Commodities overtook Fixed Income as the third ranked asset class in DALI and continued to add to its signal tally throughout February.

The recent market volatility is a not so subtle reminder that a disciplined, risk management game plan is important.  The long term relative strength indicators, like DALI, have not suggested any change to the current landscape that would warrant significant shifts in our tactical allocation.  However, we do have the ability to raise cash, as we follow a rules-based, systematic approach that can help manage downside risk.

Despite the recent spike in volatility, we have yet to see enough of a change to merit a truly defensive stance against equity exposure (far from it, in fact!).  When that occurs, we have a proactive plan in place that will adapt when necessary.  It is important to mention that we did not see any of our indicators suggest raising cash with the recent drawdown.  It is also important that the main objective of our strategy is to provide a path to being invested.  It is designed to respond to material changes in risk, not to react to the first sign of market turbulence. 

Our strategy removes emotion from the equation, so that we do not fret about the correct time to adjust our strategy, whether that means getting more defensive or more offensive.  That being said, nothing is perfect nor works all of the time.  In the grand scheme of things, this type of strategy helps us ride out normal corrections, but also limit losses in true bear markets.  Disciplined investing is not always easy, but it offers you, our clients, clarity and peace of mind about what is happening with your money. 

Until next time, cheers!

Jim

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