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The world has just become a more dangerous place.
Putin’s invasion of Crimea reminded me a lot of the events that led up to World War II. The stakes are much higher now so I don’t expect World War III, but Putin might be tempted to see how far he can push things. From a market perspective I am not too worried, as markets don’t seem to mind wars. However, we could see spikes in oil, gold, and Treasuries from time to time, depending on what Putin decides to do.
Entering February we exited most of our momentum-based stock positions as amid the short-lived emerging market crisis, the relative strength shifted from stocks to bonds. As the market started to recover during the month, we began to move back into some of our stock positions. Yesterday we completed those moves as the momentum is clearly back in favor of stocks. Because we combine different methodologies and use multiple time frames in our analysis, we didn’t completely exit the market in February and we didn’t get completely back in yesterday. Our countertrend models remain mostly in cash as the market appears to be overbought in the short term.
Readers might wonder why we are getting back into the market now that it has reached new highs. Or putting it another way: was it wrong to get out in February and is it wrong to get back in now?
Was it wrong to get mostly out in February? No. Successful investing is not about getting it right every time, which is impossible. Successful investing is about avoiding the large loss and putting the odds in your favor so you are right most of the time. If you can do those two things then you will do well. Given the drop we saw in the market coming into February, the odds were that it would continue. One of the strengths of tactical management is that you are able to respond pretty quickly to changing markets. Once it became obvious that the downtrend was reversing, we started to get back in.
Was it wrong to get mostly back in as the market is making new highs? No. New highs make great news but they are nothing special. Markets are always making new highs; if they didn’t then investors wouldn’t make any money. I can’t tell you how many investors I have spoken with who exited the market during the lows around March 2009 and then never got back in because they were afraid of investing in an uptrend.
Staying in harmony with market trends won’t have you in the right spot all of the time, but it will most of the time. It will also keep you out of trouble during large down moves and make sure you don’t miss out on large up moves. You might lose a little bit during a downtrend but you won’t lose a lot. You might also miss the beginning of an uptrend but you will still catch most of the move.
Positioning and Recent Moves
We have made a number of changes going into March. On the stock side we have added positions in Small Cap, Mid Cap, and Dividend Stocks. On the bond side we are back into high yield bonds.