Legendary fund manager Stanley Druckenmiller once said: “Probably one of my greatest assets is that I’m open-minded and I can change my mind very quickly.” Although I’ve been very bullish on the markets the past few months, a few warning signs have shown up that have turned me cautious over the near-term:
1) The Nasdaq Composite has experienced heavy distribution recently. 6 of the past 11 days have seen higher volume down days, showing me there’s a decent amount of institutional selling.
2) The major indexes are below their 50-day moving averages, which is usually an area of institutional support. In addition, the Russell 2000 decisively broke through its 50-day moving average and is now approaching its 200-day.
3) Many leading stocks are reporting strong earnings but they are being met with selling pressure. While I still like many of these companies, I reduced my exposure because they need time to digest their gains from earlier this year and to reset technical bases.
4) We are heading into a seasonally difficult time of year, as August and September are traditionally volatile months. Since the majority of S&P 500 companies have already reported earnings, the news focus will be on the escalating geopolitical tensions, the September debt ceiling vote, and the upcoming Fed meeting. In other words, the news cycle will be filled with headlines that could further rattle the markets.
One point I would like to stress is that traditionally, when these warning signs show up, it usually leads to some form of a market pullback or increased volatility. However, over the past few years, the market has been incredibly resilient and brushes everything off.
So what does one do? The most important thing right now is to know your time frame and to not follow anyone blindly. For me, the disciplined thing to do is to heed these warning signs and proceed with caution. As a professional money manager, my number one priority is to protect client assets in case these signs lead to more downside. It wouldn’t surprise me to see some choppiness over the next 6-8 weeks, which is why I currently have a heavy cash position for clients. I will of course keep in mind how resilient the market has been over the past few years and how sentiment can turn VERY negative VERY quickly. It is prudent, however, to show some patience and discipline right now. As I’ve always said, it hasn’t paid to turn bearish, but there is nothing wrong with being cautious until market conditions improve.
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