Has the bottom formed in the US Stock Market?
For Tactical Asset Allocation to work you need to know when you have passed a market top or a market bottom. The theory is simple enough: Sell after a top has formed so you don’t ride the market to the bottom, and buy after a bottom has formed so you can take advantage of the upside as much as is reasonably possible. Notice that we say after a top or bottom has formed, because selling at the exact peak of the market or buying at the absolute lowest point is impossible without relying on a lot of guesswork and luck.
Tactical Asset Allocation is a more reliable strategy because it employs both a sell discipline and a buy discipline. Currently, we are watching our indicators to see if a bottom has formed after the market volatility in August. We are looking for a market bottom to determine if the time is right to put a percentage of capital back into the market after we took a defensive position a few weeks back in a number of our portfolio models.
So the question is: How do you know a bottom has actually formed?
The answer is that you cannot know 100% for sure; however, you have the best likelihood of success by using unbiased data and multiple indicators that range in sensitivity. Point and figure charting and relative strength rankings are two of the resources we use to obtain unbiased data. They report what is not what might be.
Indicators are often patterns that form within that unbiased data. Some patterns indicate a positive or negative trend very early, however they also tend to reverse back and forth more often. Other indicators take a much longer time to change position. If you act on the very early indicators it is fairly likely that you will be consistently whipsawed, ending up zigging when you should be zagging. If you wait to act only on the long-term indicators, you may miss out on a significant portion of the upside, or ride the downside farther down than you would have liked too. So we use an array of indicators so that we can see the trend as it forms. This is why Tactical Asset Allocation is sometimes referred to as “trend investing.” The goal is to find a happy medium between reacting to soon and responding too late.
Our early indicators are showing that a bottom could be forming in the US Stock Market right now. We have even seen the first of our medium-term indicators reverse back up. Is it a trend? Maybe. It might be a bit too soon to tell, but we are watching closely. Either way we have a plan so we know what our response will be either way.