Market Calls for Incremental Approach

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Includes: DBA, GLD, JJC, SLV, VTI, XLE, XLI
by: Chris Ciovacco

As of 7:50 a.m. ET, the markets are stable, which is a good sign for now. The situation with Col. Moammar Gadhafi needs to be monitored closely. This morning’s Wall Street Journal (WSJ) provides a good visual of the unrest:

On the ground in the eastern chunk of this oil-rich desert nation, the signs of rebellion are plain to see in the armories of a military base near Baida: Weapons crates lie busted open and empty. Rifles are missing from their racks. Left behind are helmets and gas masks and cleaning kits—things that can’t shoot.

Based on the combination of (a) problems in Middle East, (b) weak housing data, and (c) an unfavorable risk-reward environment, we did some selective selling yesterday. We took some profits off the table and reduced exposure to copper (NYSEARCA:JJC) and agriculture (NYSEARCA:DBA). We still own both positions, just not as much. Selling a small amount allows us to step away from risk incrementally, which has a few benefits:

  • If Tuesday’s slide extends into today, and possibly morphs into something bigger, we have broken “mental inertia” with the sell button. Hypothetically, if we see big declines today, our mental set is “we sold some yesterday and we can sell more today if needed”.
  • If yesterday turns into a one-day pullback, mentally, we are fine with that since we only sold a small portion of our portfolio yesterday. We would be happy to make money if the market can hold.
  • One of our biggest enemies in trading and managing money is indecision, or the inability to take action when the situation calls for it. If you sold nothing yesterday, and the S&P 500 is down 30 points again today, you may shift into “it is too late to sell mode”, which can be a dangerous place to be.

The CCM Bull Market Sustainability Index (BMSI) hit 4,195 last Thursday. As the table shows below, markets with similar profiles have been difficult to make money in (not impossible). For this condition to be cleared, the markets need a pullback (Tuesday) or a period of sideways consolidation.

Risk-RewardClick to enlarge

From a strategy perspective, we will continue with the incremental approach. If the markets can move higher, we are happy to stay with our longs in gold (NYSEARCA:GLD), silver (NYSEARCA:SLV), and energy (NYSEARCA:XLE) to name a few. If a pullback does become a correction, we mentioned some possible buy candidates in Bears May Be Taken To The Woodshed During Next Correction, including VTI (broad U.S.), XLI (industrials), and XLE (energy). The article (Woodshed) also shows a possible range of major support for stock prices, which may come in handy sometime in the next few weeks.

Disclosure: I am long JJC, DBA, GLD, SLV, XLE, VTI, XLI, XLE. Generally, I am long golbal stocks and commdities.