Well this year is off to a dramatic start (David Bowie AND Alan Rickman? Ouch!) – not to mention the global stock markets.
According to Morningstar data, as of January 14th, the S&P 500 is down around 6.0%. The Russell 2000 (Small Cap Index) is down around 9.7%. And the DJ China index has been leading the charge, down around 17.0%. Happy New Year!
A correction like this, to us, seemed like it should have happened last fall. Since the end of 2014, momentum has been falling, feeling similar to the setup we had before the 2008 downturn (see chart below).
Chart (above) is of the S&P 500 from January 2007 to January 2016
Last September is when we hit the “red line warning,” or negative crossover of moving averages, and that environment is still in play. Falling momentum plus a negative crossover of the moving averages theoretically equals rough times ahead. Knowing this, just last month in our Market Commentary, we said “we believe this market has the potential to go lower rather than higher in the near future” – and here we are.
We have been positioning for this scenario as far back as last September, even though it has taken awhile to finally pay off. Most of our strategies have not taken the hit this January has brought, and some are even in positive numbers year to date. Because we thought this correction was coming sooner than later, we were able to move to a protective position well before it was needed.
The fact that we are still operating in this potentially bear market environment has certainly influenced our thinking going into 2016.
For a while now, we’ve been developing a bond rotation strategy that would work similarly to our Sector Trending (sector rotation) strategy. New tools have allowed us to systematically review investments held relative to the environment. And now that this concept is finally ready, it will be added to our CORE strategies in the 1st quarter, and other strategies later in the year. We are excited to have an improved bond rotation with the aim on refining our protective strategies when downturns occur. Stay tuned!