May 9, 2022
The market’s implosion is continuing today, with the indexes hitting new lows and many individual stocks in freefall. The selling is getting emotional, and the conditions are in place for some sort of low in the market soon, but those secondary indicators have had no effect in recent days.
WHAT TO DO NOW: The market’s implosion is continuing today, with the indexes hitting new lows and many individual stocks in freefall. The selling is getting emotional, and the conditions are in place for some sort of low in the market soon, but those secondary indicators have had no effect in recent days. In the Model Portfolio, we came into the week with nearly three-quarters in cash, and today we’re forced to let go of Arista Networks (ANET), which has completely broken down. That will leave us with a huge 82% on the sideline; we could put some of that to work if the market finds its footing, but tonight we’ll sell and hold the cash. Details below.
The market continued to unravel today, with a gap down at the open and mostly sour action all day. As of 2 pm ET, the Dow was down 475 points, the Nasdaq had imploded another 467 and most growth funds were off 5% to 9%.
It goes without saying that the primary evidence remains bearish, with all of our trend-following indicators solidly negative and with many former leaders collapsing on a daily basis. Simply put, the tide continues to go out, and until that stops, it’s best to remain defensive.
Of course, the question on most investors’ minds is whether we’re close to a low point, even in the short term. Right now, there’s no doubt that the situation is very extreme—beyond what we’re seeing with individual stocks, today saw well over 2,300 combined new lows on the NYSE and Nasdaq compared to 35 or so new highs, nearly 90% of Nasdaq issues are below their 200-day lines and even major indexes like the Nasdaq are very extended to the downside (12.5% below its 50-day line).
All in all, the conditions are certainly in place for some sort of selling exhaustion and bounce, so going out and selling wholesale isn’t likely the best course of action. However, as we wrote in last week’s issue, holding and hoping isn’t a prudent course, either, as there’s nothing that says the market can’t keep declining before finding a low.
In the Model Portfolio, we’re already highly defensive, coming into the week about three-quarters in cash, but because of the action and our loss we’re forced to sell our stake in Arista Networks (ANET)—if you want to sell some/hold some, that’s up to you, but we’ll follow the rules and cut bait. SELL
For now, we’ll hang onto our remaining two positions (SSO, DVN) and a cash position of nearly 82%. Frankly, we could nibble on a position if the market does find its footing, as being nearly totally out of the market isn’t our usual gameplan, but we see no reason to throw money into the current sinkhole environment.
Bigger picture, such an intense meltdown along with horrid sentiment means this past six months represents a decisive “re-set” of the market—a bear phase that, when it concludes, will present great opportunities. But obviously, now remains a time for caution and patiently waiting for the buyers to retake control.
Don’t hesitate to email me directly at email@example.com with any questions. We’ll have our regularly scheduled update on Thursday (May 12).