Weekly Note - March 24, 2020

ALERT: This is a good time to return to the target weights of the model portfolio you have selected. Attached is the weekly publication.

A Likely Beginning of a Relief Rally

I am sending the note out early this week because we may be beginning the relief rally I mentioned in my recent note.

Also, the target weights for the DJIA-linked ETFs (DIA, DDM, and UDOW), call for taking some money out of the stock market at the end of this week. When you move to the target weights this week (even before Friday if you choose), use the target weights on the attached weekly publication.

The DJIA’s move higher today is, I believe, a function of these factors in addition to the Micro MRI being at an extremely low level:
  • The likely passage of the stimulus bill
  • Short-term investors unwinding their short positions (bets that the market will go down from here).
  • Bargain hunters being attracted the valuations for the DJIA
  • Possibly, the President moving to get everyone back to work

While there is much uncertainty in the real world, this may be the beginning of the Upleg A in the relief rally I mentioned in last blog post.

Now is a good time to move to the target weights of the model portfolio you used during the recent decline. When the relief rally moves up quickly, the fear of missing out on that price appreciation will be high. Be ready for that emotion, which I believe it is one of the strongest emotions that investors feel.

But I believe this is not the time to be more aggressive than model portfolio you used during the decline. There will be a better time in several weeks or maybe months for being more aggressive than you were during the decline. Of course, you are fee to use any model portfolio on the publication.

Recent blog post for more information on these topics.

If you cannot stomach the volatility of this uncertain time, you are, of course, free to reduce the aggressiveness of your account by raising cash or switching to a less aggressive model portfolio.  Please see the recent blog post for more information on this topic. https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html

Reduced Allocations to DJIA-linked ETFs

You may notice that the algorithms for the D5 signal set caused the allocation to the DJIA-linked ETFs (DIA, DDM, UDOW) to decrease this week. The reason driving this shift is that the market has not been responding as the algorithms expected, and the algorithms pull some money out. Basically, they are saying something is going wrong in the markets – take some money out and come back later. We may ultimately conclude that such reduced allocations were not useful in our current situation. But this signal has added value over the last 100 years, and we should follow it.

Following the Disciplines

As you know, I frequently advocate staying with the disciplines. I have seen many professional and non-professional investors lose money and their ability to focus by deviating from their established processes. I was evaluating professional investment managers for pension funds in the 1980s. The 1987 crash was interesting in that many of the investment indicators that investment professionals look at all day about the health of the markets went haywire. The indicators were erratic and in many cases contradictory. When the crash was over, we evaluated what happened and how managers navigated through the conflicting signals.

We found that those who followed their established processes did better. Those who saw the chaos and tried to reconcile all the conflicting indicators did not do as well. They responded to one indicator at one time and another indicator later, and they ended up trading aggressively to conform to what they saw most recently – believing recent information to be most reliable. I say this to disclose my bias in these situations. I feel like we are flying blind in many ways right now. But if we avoid being distracted by trying to reconcile all the conflicting information, I believe that we will navigate this more effectively.