It is hard to believe that in three trading days, the market has penned its first 10% correction in over 900 trading days. This decline may be an unfortunate reminder of the last bear market, and if you are feeling anxious about your portfolio, don’t worry—you have lots of company. In fact, the market has set a new record for the speed and breadth of market volatility.
Not only has the market dropped, but we have also witnessed several areas of the evidence we follow move into bearish territory. Given this recent downgrade, we now believe the probabilities are high that we are transitioning from a bull market to a bear market cycle.
In the remainder of this post, I’ll summarize our response to the recent market events in each of our three Pinnacle strategies.
Dynamic Prime Strategy
Our indicators now show that the possibility of a steeper decline is rising, and we are taking steps to adjust your portfolio asset allocation to reduce risk. These adjustments, coupled with the fact that your portfolio is well diversified, should help reduce portfolio volatility if a bear market actually materializes.
Over the next few days, you will be seeing trade confirmations as we change the risk/reward character of your portfolio to reflect this new investment environment. It is worth noting that for the past six years, investors who have acted to defend against market declines have not been rewarded as the market has continued to climb higher. That may once again be the case. However, our investment process provides us with a systematic and disciplined approach to dealing with market volatility, and we feel that protecting your capital is a higher priority than it was a week ago.
Dynamic Market Strategy
The satellite of the Dynamic Market strategies, comprising 30% of the portfolios, currently remains on a defensive posture, where it has been all year due to valuation concerns. Barring a sudden and large enough decline in stock prices to alleviate those concerns, the satellite will most likely continue to avoid stocks entirely and remain on a defensive posture in the near future.
Dynamic Quant Strategy
The allocation of the quantitative satellite, comprising 37.5% of the Dynamic Quant Strategy, has remained invested in stocks so far in the third quarter. The sector allocation has seen very little change, with only one trade going off between Consumer Staples (downgraded from mild overweight to neutral) and Telecom (upgraded from neutral to mild overweight).
However, the recent turbulence experienced by the stock market has caused some deterioration in the technical component of the strategy, which has been moving closer to issuing a potential “sell” signal for stocks in the upcoming days. In the event of such signal, the entire satellite of the strategy will immediately move to a defensive posture by selling out of stocks entirely.
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We will do our best to keep you updated as events unfold, but we ask for your patience given that markets are moving at the speed of light right now. Should you have any questions or concerns, please contact your Wealth Manager.