DAY HAGAN RESEARCH UPDATE
RENT THIS MARKET, DON'T OWN IT
Buying and selling pressure can change without notice.
June 17, 2016, 2016
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Fed, Brexit, dollar, terrorism, yield curve, Chinese banks, U.S. election, <fill in the blank> are all reasons to hold minimal core positions, have cash on hand, and remain flexible/tactical when indicators confirm.
In extended trading ranges it may be difficult to sit through 4% to 5% shifts up and down. This year alone the S&P 500 index has gone from “up on the year” to “down on the year” more times than I can count. I have reduced my core holdings (long only) and take on more of a trader’s/tactical mentality. While I haven’t gone to a day trading approach (going home flat), it is something I have considered several times over the past few days. I work with a 40-year investing/trading veteran, which advocates in the current environment to “only have on what you can sleep with.” So cash has been my Ambien.
There are many examples in the table below, which shows the percentage gains for various assets, but let’s just focus on the EAFE Index. For the Q1 of 2016, the EAFE index declined -6.52%; in March the index gained 2.93% (in January and February, the index was down considerably). If you’re looking at trend and momentum indicators, March’s strength would signal improvement. Longer-term trend and momentum indicators continue to improve in April as the index gains 1.25%, and you start to allocate money and are doing well in May (1.88% gain). The EAFE index peaked a few days into June, however, and has already declined -4.3% so far this month. A long-term model is most likely still bullish, but you are down on your position, and short-term trends don’t look so good. Do you hold? If you are a longer-term investor, the answer would be yes, but be prepared to sit through volatile times.
HOLDING PERIODS MATTER
The market remains in a broad trading range. Resistance is not only technical, but fundamental as well. Most valuation measures would suggest that we are at the top end of historical “fairly valued” (slightly overvalued) ranges, as an example shows below.
While the upside may be limited, the downside is also limited given longer-term breadth and technical measures, an accommodative Fed, slow but steady economic growth, and the overall low global yield environment.
Below are a few areas that are extended to the downside where I would consider looking to establish minimal long exposure/allocation because of oversold extremes:
- Health Care
- Regional Banks
- Small Caps
The following are areas that are extended, and investors can consider reducing exposure or hedge positions. These areas appear technically overbought:
- Gold miners
Bottom Line: Active management is key when trading ranges, valuations, technicals and macro-influences collide.
Have a wonderful week,
Day Hagan Asset Management Investment Committee
— Written 06-17-2016
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