In my last post, I talked about the stock market being at an all-time high and interest rates in the bond market beginning to rise. Both of these situations are pointing towards higher risk in the stock and bond markets, and evidence of deterioration from high levels is now appearing – see the chart in this post and you’ll see the decline.
The technical indicators that I follow to measure the market include short-term, intermediate term, and long-term. This week, the short-term indicators moved to a negative trend. How long they will stay negative is anyone’s guess.
After seeing the run-up the market has experienced over the last few months, it’s hard to watch a pullback. We have now seen two weeks of back-to-back losses in the S&P 500, totaling about 4%. On the surface that doesn’t seem like a big deal, but to add to that, the short-term indicators for the market have now turned negative. This is the first time that we have seen back-to-back losses in the market since November, 2012.
Normally, we don’t see losses in both the stock market and the bond markets in the same week, but last week Ben Bernanke spooked the bond market when he talked about the Fed curtailing the purchase of bonds. When the Fed finally ends its purchase of bonds it will be both good and bad. It will be bad for those who own bond funds and target date funds (typically found in a 401(k)), but it will be good going forward because it will produce higher interest rates.
What to do now?
One approach is to work more like a dimmer switch than a light switch. In other words, while it may not make sense to move completely out of the market, it may make sense to manage individual positions and move out of them as they begin to deteriorate.
The chart above was created by Dorsey Wright and Associates. The postings on this site are my own and do not necessarily represent Dorsey, Wright & Associates positions, strategies or opinions. The information in this post should not be construed as investment advice. You should consult an investment professional prior to making any changes.