Risk Management Matters

Evidence that bulls may be heading for the exits highlights new risks for the bull market

Portfolio Applications update: Our latest update to the Systematic Asset Allocation portfolios is now available. Key takeaway: Equity exposure within the US has shifted away from large-caps and toward mid-caps. Our systematic allocation model has reduced exposure to overall equities and fixed income in response to the trend in commodities turning higher. At the sector level, the largest sectors are the weakest on a relative basis and the number of sectors above their 200-day average is contracting.

Sentiment data from last week shows that there are more bears than bulls on the AAII survey and the equity exposure among the investment managers surveyed by the NAAIM has dropped to its lowest level since last May. From the perspective that you need bulls to have a bull market, this move toward a more cautious outlook is not welcome. The good news is that the best signal from this sentiment data comes from the II survey and as long as the bull-bear spread on that survey is above 20% (last week it was still above 40%), the bulls get the benefit of the doubt.

The percentage of global markets hitting new highs in February contracted and for the first time this year, fewer than 70% of global markets are above their 50-day averages (for context, all of this was prior to news of the outbreak of a new war in the Middle East) for the first time this year.

This represents the a negative mark on our Bull Market Behavior Checklist and is an important reminder that risk management is an important when it comes to accruing long-term gains.

Our risk appetite indicator is also moving precariously close to signaling a risk off environment.

While February was neither particularly strong nor particularly quiet, our tactical Fear Or Strength model remains bullish for now. If the headlines impact market behavior, March could bring more noise and weakness.

If that happens, the need for risk management will appear more acute.

For now, however, the bull market retains the benefit of the doubt and the path of least resistance for most assets (especially outside of US large-caps) is to the upside.

Download our entire Relative Strength Rankings report.

Thanks for reading. Good luck this week. -Willie