The Big Picture For The Week Of June 3, 2012

Includes: SPY
by: Roger Nusbaum

I was away from the market and haven't checked any numbers, did anything interesting happen?

That is a humor attempt--I was not away, and I know what happened in yesterday's trading. Obviously the goings on in Europe stink and the jobs situation in the US stinks as well, and explanation fallacy notwithstanding, these two things contributed to yesterday's decline.

That Europe stinks is not new information, but certain aspects of the situation are clearly deteriorating. The shock is long gone but the news keeps getting worse and the market is held hostage to the situation. There appears to be an influence on markets that are mostly disconnected from Europe or otherwise are not overly dependent on Europe. Part of this equation means that non-European foreign has been struggling as well. Long term this does not have to be significant but in the short term it does affect returns.

Last summer I thought we had rolled over into a recession, and while something happened in August, an actual recession was incorrect. The current jobs data and the trend of fewer jobs created in successive months going back a while now is bad, and brought out some recession talk during the day on CNBC. Maybe there will be a recession before the fiscal cliff, during the fiscal cliff or not at all, but I believe it is correct to say that we are muddling along without making much real progress. This is mostly what I expected for domestic markets for the new decade, but things have been more volatile than I thought up to this point.

With yesterday's decline the S&;P 500 closed below its 200 DMA, which very significant for us. If it stays below in the next day or two we will begin to take defensive action. That the 200 DMA is pointed upwards is one reason to think this breach will be like the last few breaches, in that the market won't end up going down a lot, but that remains to be seen. In the meantime we will be disciplined to a strategy we laid out long before the market got into trouble. The best thing any investor can do is be disciplined, and the worst thing is to succumb to emotion.

If we need to take defensive action, then generically speaking we will look to reduce volatility while maintaining or even increasing the yield in larger accounts, with 'larger' being defined as being large enough for it to make economic sense to have 30-35 holdings, most of which are individual stocks. We've already done a little of this in the last few weeks. For mid-sized and small accounts the focus will probably be on reducing volatility.

As mentioned many times in the past, as a matter of investing philosophy, our objective is to try to avoid the full brunt of large declines; small declines go with the territory. If you are able to avoid the full brunt of a large decline, that is good, but if you don't, then at some point markets come back. We are still not back to the 2007 high but the market did retrace a very meaningful portion of the financial crisis decline even after this most recent drop. This of course speaks to the patience that is required with investing, regardless of the strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.