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Big correction or bear market?

|Includes: AGG, DBB, EWH, EWJ, GLD, IDX, SH, SPDR S&P 500 Trust ETF (SPY), TLT

Amid renewed market turmoil, the S&P500 experienced on August 18th its 4th day of 4-percent or higher loss since the beggining of the month. This pops the question: are we in a strong correction mode or have we entered a new cyclical bear market? One element of answer: the last time such a string of down days occurred was during the 2008/2009 bear market…

But the final answer remains anyone’s guess, and we have no magic ball to see into the future. But what we do have is a system that is sufficiently flexible to identify and adapt to underlying trends in global asset classes, thus allowing us to be positioned to benefit from big market developments. Bonds have been in an uptrend since February; U.S. Equity indices have topped in early may. Big players have been reallocating their portfolios accordingly other the last few months. So bad economic news from Europe and the U.S. left aside, the recent slide of world equity markets should not have come as a big surprise to anyone looking at relative strength rankings. No luck here, but a proven model and way of investing that recorded strong positive performance during previous major trends such as the autom 2008 crash and subsequent rebound in early Spring 2009, and the last two big commodity price rallies.

As a consequence, our portfolios have switched to defensive mode at the end of July, with a large allocation to cash and bonds, as well as gold and a short exposure to U.S. stocks.

Accordingly, as of Thursday August 18th’ close, both portfolios are showing significant positive returns with limited volatility. Since the July 29th close, the SPY has lost a staggering 11.46% with a 53.5% volatility (!). In the meantime:
our conservative portfolio has returned + 4.18% with a 14.7% volatility, and
our aggressive portfolio has returned + 2.15% with a 11.0% volatility, in spite of some exposure to Asian emerging equity markets (Indonesia, Hong Kong).

So where are we now?

Obviously, the trends are still pretty strong and if we were to rebalance the portfolios today, they would be even more conservative. The only change in the conservative portfolio would be to sell the base materials position (NYSEARCA:DBB) and consequently increase the share of cash to 40%. In the same vein, the aggressive portfolio would sell the long equity position and also reach a 40% allocation to cash.

At this stage though, one needs to be particularly cautious, as the strongest performing classes (gold and long term treasuries) have experienced parabolic moves over the last few weeks.

These are once more increadibly interesting times. It is highly rewarding to record strong positive performance when global markets are in such turmoil. We hope our model helped you deal with these highly challenging last few weeks.