Since I was traveling this past weekend for the 2015 World Economic Conference, I did not have a chance to analyze the short-term market dynamics thoroughly in this past weekend’s X-Factor Report. However, there is some excellent commentary worth your reading from Authur Hill, Bill Gross, and Crispin Odey.
However, I did want to send out a quick note on the very short-term oversold condition of the S&P 500.Â
The bounce at the end of the day yesterday, driven by news flow out of Greece, was likely the beginning of a short-term oversold retracement of the recent decline. It is important to keep in context that the recent decline, despite the media’s incessant hand-wringing and panic, has been a mere 3% since the beginning of this year.
Nonetheless, during any correction, or more importantly during a mean-reversion process, the financial markets do not move in a singular direction but rather like a “ball bouncing down a hill.” For investors, it is these short-term bounces that should be used to rebalance exposure to “portfolio risk.”Â
As shown in the chart below, the S&P 500 has gotten oversold on a short-term basis and is due for a bounce to the current downtrend resistance line. Importantly, the market is sitting on what has been very important support in recent months at the 150-day moving average. A failure of this support will lead to a retest of the October, 2014 lows.
A rally from this support line could last several days to a couple of weeks. It is advisable to use the rally to “clean up” existing portfolios by selling laggards, reducing high-beta risk and rebalancing winners by taking profits and rebalancing back to target weights.
(Important note: Notice that I did not say “rebalance portfolios” which implies selling winners to buy losers. The goal here is to let winning positions continue to flourish by simply “pruning” the position, and “weeding” the portfolio by selling the losers dragging on overall performance.)
