March 21, 2022
Good morning,
In the midst of the Fed turning hawkish and raising rates last week, and with no tangible evidence of progress on resolving the war, the market staged its largest one week gain in a year and a half. The S&P 500 jumped +6.2% on the week, effectively wiping away half the year-to-date losses there. Although last week’s move may simply be other side of the high volatility environment we’ve been suffering through since January (think over-stretched rubber-band), it was strong enough to suggest it isn’t over regardless of its true nature.
The damage done to market indicators in the past 2½ months has been meaningful, and as I’ve said several times, has likely spelled the end to the cyclical bull market that started in March of 2020. On the other hand, the market has yet to show bear market behavior which is why there has been no selling in taxable portfolios. Without overwhelming selling volume days (excellent signs of a bear market), the past 2mo has looked more like a correction. So, signs of a correction and the end of a bull market; what does one do with that information? Get nimble. We cannot trade our way through a volatile market that may be rolling over from a bull market trend in taxable accounts – again, the tax consequences would be overwhelming. But nimble means being open minded.
I believe the most important component of money management is keeping portfolios aligned with prevailing trends. With the cyclical bull trend of 3/2020 likely over, it is time to align portfolios to a neutral – not bull, not bear – trend. Unless bear market signals are flashing, it is best to avoid selling (de-risking) in periods of high volatility (>30 on the VIX) and extreme pessimism. With last week’s rally, volatility is off its highs, and oversold readings are off their lows. Let’s continue to give this rally time to play out over next few weeks (best guess of this rally’s duration, but assessed daily). Then we can re-align.
Be well,
Mike