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Red Light!

I am continually amazed by the number of purported experts on TV and in print that are predicting a coming market crash. I guess if you keep making this prediction long enough, you are bound to be right at some point. But, will these prognostications help you to reach your goals? Hardly. They are more likely to derail you.

The recent volatility in the markets has many investors feeling a sense of unease. Despite this increased volatility, bonds and U.S. equities remain the strongest asset classes of the six that I follow on a daily basis. Until stocks fall from their number 2 position, I will stay the course. Will stocks fall from here? That remains to be seen. Earlier this week, one of the market indicators that I follow did flash a cautionary signal. Even though this signal comes at a time of the year when the market always seems to throw a few "curveballs" as we are now in the seasonally weak period, it does not mean that I will be shifting away from stocks. What it does mean is that the defensive team is on the field and my focus has moved from wealth accumulation to wealth preservation.

This indicator's shift is akin to that of a red light. Like the literal traffic light, a "red light" is not caused by a catastrophic accident, but is rather there to greatly reduce the probability of such an event. I am sure that you know someone who has at one point or another, disregarded a red light for one reason or another. They may have escaped unnoticed. Or in some states, they may have simply received something in the mail from the Department of Motor Vehicles suggesting a contribution of some kind. Or, they may have experienced a far worse outcome. The point is that a red light suggests elevated risk to you and those around you. I will remain vigilant.

The S&P 500 had rallied about 12% (through 5/18) from it’s February bottom. Prior to this recent rally, the S&P 500 experienced a 10% correction. So what's next? Well we cannot know for certain, but if U.S. stocks begin to deteriorate relative to the other asset classes, I will react appropriately. As I have said before, it is important to tune out the short-term market noise and listen to what the indicators are saying instead. My indicators have guided me safely in the past; and they will guide me safely in the future. Positioning investments toward current trends, rather than past or future presumptions, serves as the driving force behind my portfolio management methodology.