Over the course of the past six weeks or so, several major market segments have not only stopped rising but have begun to clearly demonstrate declining price trends. Click here to access our current view of the markets – our five-year ETF charts with both their respective short- and long-term trend-lines. These segments include international emerging markets, commodity-based equities, and high-yielding fixed income. All three of these segments have been eliminated from of our managed portfolios at the present time. In both The Appleton Group PLUS strategy and Appleton Group Tax Managed Growth strategy, the emerging markets and commodity-based equity positions have been replaced with “bear-market” positions. Bear-market investments are designed to profit from market declines, and we use them as a type of hedge to offset weakness that might be occurring in the market segments that we still hold.
Speaking of which, there are three major parts of the market that are still demonstrating rising price trends, all of which are in the U.S. They are Large Value (big companies that pay dividends), Large Growth (big companies that are generally involved in technology, pharmaceuticals, and retail), and U.S. commercial real estate. All three of these areas remain in our portfolios at the present time as their rising price trends remain largely intact. It should be noted that each of these three segments have price trends which are deteriorating; however, that deterioration so far is normal, and at the present time no further action is required. If the deterioration continues, we will reduce and/or eliminate these positions at such time as the downward trend emerges.
I believe that the market’s revaluation of the international and commodity-based equity segments is rational, as both China and India have taken steps to intentionally slow down their economies, Russia is no longer benefitting from oil prices well over $100 a barrel, and commodity prices in general have peaked (at least for the time being). At the present time, it appears that this month-long price correction is largely normal; however, as with all market declines it is impossible to determine how just how far the deterioration could run once the downward trend emerges. All declining trends (as well as all rising trends) begin exactly the same way: with a short-term trend line crossing a long-term trend line. Simple as that. With Greek debt once again in the headlines, the looming vote to raise the debt ceiling here in the U.S., massive budget cuts by state and local governments, continued high unemployment and overall declining commodity prices, that market is clearly telling us that it is prudent to be a bit cautious at the present time.
All trends eventually run their course, and we see it as our responsibility to identify the prevailing trend for each security we own and to take action as required to keep our clients “on the right side of the market.” This strategy continues to be among the most efficient in the investing universe, and we stand ready to adjust as necessary with the twin goals of producing as much positive return as possible while working to expertly manage investment risk along the way.