Sitting On Cash… The Market’s Next Move

Changes To My Portfolio…

I closed all of my trades keeping only my dividend fund and Disney call options. Feel free to look over how I did on the trades I closed.

Now… why did I make all these changes?

  1. The market seemed vulnerable with the huge drop at the end of August 2015.
  2. The forex rate from US –> CDN is very high and with any correction, even if my stocks do well I will begin to give up gains strictly on a stronger CDN $ (I don’t have a US currency investment account).
  3. My general thoughts on the market mechanics and my personal outlook for the market.

August 2015… 4 Trading Days for the S&P500 to Drill Down 11%

August will be a month I will always remember. Will we see worse? Time will tell, but certainly a few things have me concerned:

  1. The S&P500 has done nothing this year… no buying pressure to move the market higher.
  2. In 4 trading days, we were basically in free-fall when the bleeding managed to stop at 1,867 on the S&P500.
  3. Sure, the market can rally after the recent drop but if buying pressure was absent for all of 2015… I’ll be surprised if all of a sudden huge buying pressure kicks in to send the market to new highs.

The following daily chart seems to show that some sort of big move will occur within the next few days with the S&P500 trading into the tip of a triangle formation and with the Fed meeting coming up, I am expecting a move up according to the chart but who knows…

S&P500_daily

Wednesday Aug 19… the S&P500 drops 0.77% closing on the 200 day MA.
Thursday Aug 20… another 2.11% drop.
Friday Aug 21… Another 3.19% to bring the S&P500 down just over 6% in 3 days.
Monday Aug 24… the nail in the coffin… with the S&P500 dropping another 5.27% to close down another 3.94%.

There’s the 11% drop finally ending with a close of -10% in 4 trading days.

Natural Market Mechanics… Intact or Broken?

The market seems to trade with so much attention to news from central banks. The Federal Reserve will begin a 2 day meeting tomorrow on Wednesday Sept 16, with an announcement in the afternoon of Thurs Sept 17 as to whether it will increase rates.

The volume this week is an indicator that the market is waiting to hear what the Fed will do:

S&P500_Weekly

What bothers me is how closely the market is paying attention to news about what central banks around the world are doing, whether it’s a Greek bailout or a Fed rate hike. It seems like we are so dependent on money printing and relaxed monetary policy. It is difficult keeping track what every part of the world is doing, and a scary reality of how different regions can impact my returns.

What drove the market down so far in August 2015? Was it just a correction before the market continues its huge bull run? Clearly rates will have to rise at some point so is the market that sensitive to indicate that the economy would not be able to handle even the smallest increase?

One Investor’s Opinion… What The Market Will Do Next…

To begin the story, we need to take a look at the following long-term chart and remind ourselves of 1 fact… technical indicators lag (especially true the longer the time-frame).

That fact sets the context, but to put it in perspective… look at how much the 50 and 200 week MA’s continued to climb as a result of the recent aggressive bull run. It takes a lot of buying pressure to keep these long term averages moving…

S&P500_2004 to 2015

Take a look at late 2008 when the 50 week MA finally crossed the 200 week MA, the down move was already almost done. Case in point, these technical indicators lag… BIG TIME.

From 2012 onwards, we didn’t really break below the 50 week MA forcefully like we did in August 2015. All of the moves before 2012 can be explained by tests / re-tests of the MA’s until the market established the bull run.

So now that we’re below the 50 week MA, what’s next? It might not be extremely obvious, and maybe I’m wrong… but I see the 50 week MA flattening out… a big problem for the long-term bull rally. This is a result of the S&P500 being pretty much flat from late 2014. The MACD is also crossing into negative territory, another first since 2012.

I don’t know what the catalyst will be for the next market crash. I don’t even know if we will see another market crash but regardless of what happens I am remaining very cautious and adjusting my portfolio to protect my capital.

Just to be clear… I am not predicting a market crash at this moment, but I do have to honestly ask myself if the market will head lower. If we see some more aggressive drops, a test of the 200 week MA should not be out of the question. This would place the S&P500 at 1,700. If we reach that level, it would make sense to rally back higher.

I don’t think the market carries the same risk as 2008, but I am cautious about potential market weakness.

Holding such a large position of cash is difficult for me because I know cash is not productive since it doesn’t generate any returns, however I feel it is necessary. I will also definitely remain cautious with any investments I decide to make. My dividend strategy still remains intact, and if I feel I can take advantage of down legs in the market I will buy a few put options to profit as the market falls.

I feel like the market has really begun to test investors nerves and I hope your investment portfolio reflects your risk tolerance. I wish you all the best while we wait to see what the market does next…