July 2009 Update
July 1, 2009
By Tim Chapman
June was an exciting month in the stock market if you like investment rollercoasters. Stocks opened the month with a bang. By June 4th the S&P 500 was up about 3%, the NASDAQ was up more than 4%, and the Russell 2000 was up 6%! It looked like the rally that began back in March was still in full force. Wrong.
Even though prices moved fractionally higher through mid-month, the excitement waned and gave way to a really sharp sell-off. In only seven trading days, June 12th - June 23rd, stocks gave back all the early gains - plus some. The Russell 2000 lost 7.9%, while the S&P 500 and NASDAQ both lost more than 5%.
In the closing paragraph of last month's update I said we hoped the rally would continue but we would be ready to move to a defensive position if the trend turned negative. As you might imagine, the magnitude of that mid-month sell off triggered our stop-loss parameters and we ended the month in a 100% defensive position in most of our portfolios.
Interestingly enough, our Technical Model is still "Green", which would indicate an overall positive environment, and yet we're totally defensive. That might seem inconsistent and contradictory but it's not, and here's why: Our Technical Model measures lots of "internal" market indicators - like the number of stocks advancing each day versus the number of stocks declining; or the number of stocks reaching a new 52-week high versus the number reaching a new 52-week low. Altogether there are more than a dozen components we constantly track to inform what we call our "Weight of the Evidence", which helps us recognize the current overall environment. Our Model is not a short-term, fast in, fast out day-trading type approach; it is designed to help us capture most of the good times and miss most of the bad times on a more intermediate or long-term basis. But sometimes, as we saw this month, the volatility can be severe and the trend of the market can turn down very quickly - more quickly than is reflected in our longer-term model - and when that happens our stop-loss measures are there as guardrails to keep us from running off the road.
So what happens now? One of two scenarios should unfold. There was some buying again late in the month that left most of the indices with slight gains for June, and prices are up pretty good as I'm writing this newsletter on July 1st. If the up trend continues we will simply get reinvested at the proper time and the recent move to cash will just be a frustrating whipsaw trade.
On the other hand, the overall trend of the market hasn't been that exciting for some time now. For example, the S&P 500 and the Russell 2000 are lower today than they were on May 8th. So with the exception of the NASDAQ which-led by the Financial and Technology sectors-is up about 5% since early May stocks have been flat for a couple of months now. Is this the beginning of a new top with prolonged weakness to follow, or is the market just taking a breather to digest the gains from the last four months? I don't know (and no one else does either). What I do know is that at Stadion, we will always err on the side of safety.
Hopefully, next month I'll be writing about how stocks are moving higher and our concern for safety was unnecessary but on the other hand, the story may be how our "winning by not losing" philosophy once again saved us from gut-wrenching losses that can devastate a portfolio.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money. Investment return and principal value of an investment will fluctuate so that an investor's portfolio may be worth more or less than their original investment. The investment strategy presented is not appropriate for every investor and individual clients should review with their financial advisors the terms and conditions and risk involved with specific products or services. Stadion's actively managed portfolios may underperform during bull markets.